2011 AnnuAl report

Stock Performance GraphThe following graph sets forth the cumulative total return (assuming reinvestment of dividends) to our stockholders during the period beginning December 31, 2006, and ending on December 31, 2011, compared to an overall stock market index (NASDAQ Composite Index), and the NASDAQ Computer and Data Processing Group.

12/06 12/07 12/08 12/09 12/10 12/11Computer programs and Systems, Inc. $ 100.00 $ 70.45 $ 88.25 $ 158.01 $ 166.28 $ 186.00S&p 500 100.00 105.49 66.46 84.05 96.71 98.75nASDAQ Computer and Data processing 100.00 120.54 69.01 109.41 121.08 118.17

12/06 12/07 12/08 12/09 12/10 12/11

$200

$180

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$0

Computer programs and Systems, Inc. S&p 500 nASDAQ Computer and Data processing

Customer Locations at December 31, 2011

Locations

4

17

5

4

2

5

67

29

38

25

1

4

8

12

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DC -3

16 7

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16 42 365

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Company ProfileCPSI is a leading provider of healthcare information solutions for community hospitals with over 650 client hospitals in 45 states and the District of Columbia. Founded in 1979, the Company is a single-source vendor providing comprehensive software and hardware products, complemented by complete installation services and extensive support. Its fully integrated, enterprise-wide system automates clinical and financial data management in each of the primary functional areas of a hospital. CPSI’s staff of over 1,200 technical, healthcare, medical and business professionals provides system implementation and continuing support services as part of a comprehensive program designed to respond to clients’ information needs in a constantly changing healthcare environment. For more information, visit www.cpsinet.com.

Annual MeetingThe annual meeting of stockholders will be held on May 10, 2012, at 9:00 a.m. Central Time at the Mobile Convention Center, One South Water Street, Mobile, Alabama.

Financial Highlights Years ended December 31,(In thousands, except per share data) 2011 2010total sales revenues $ 173,476 $ 153,247total cost of sales 94,065 88,863 Gross profit 79,411 64,384total operating expenses 38,116 35,287operating income 41,295 29,097 Interest income, net 667 674 net income before taxes 41,962 29,771provision for income taxes 16,129 11,033 net income $ 25,833 $ 18,738Basic earnings per share $ 2.34 $ 1.71Diluted earnings per share $ 2.34 $ 1.71Weighted average shares outstanding: Basic 11,034 10,963 Diluted 11,034 10,963

revenues ($ in thousands)

11

10

09

08

07

$153,247

$127,742

$119,664

$110,013

$173,476

net Income ($ in thousands)

11

10

09

08

07

$18,738

$15,183

$15,438

$12,916

$25,833

Diluted earnings per Share

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10

09

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07

$1.71

$1.39

$1.42

$1.19

$2.34

Many healthcare information technology companies have come and gone since CPSI was founded in 1979. In most cases, the primary reason for their demise was an inability to change at the pace demanded by both the healthcare and information technology industries. Even if the companies themselves could change, they were unsuccessful in bringing their customers along with them.

We believe one of the cornerstones of our long-term and ongoing success has been our ability to successfully manage change; whether in our applications and technology, or in the external environment, such as new or updated regulatory requirements for our clients. In 2011, we demonstrated again our ability to successfully change and respond to change, turning that success into direct benefits for our clients and a competitive advantage for our company.

From a technology and system perspective, in late 2011 we announced the rollout of a new operating platform. The new technology features a Linux operating system, an open source SQL-compliant database, Java, and a cross-platform user interface (UI). Our customers now have access to an even broader range of capabilities to enhance their IT operations and the ability to implement other new complementary technologies, such as rules-based customization and compatibility with iPads and other mobile devices. This significant evolution in our system development demonstrates once again our ability to deliver to our customers a system based on advanced technology while still being highly reliable and cost effective.

With this latest release representing a significant evolution in our system development, we believed it was the perfect opportunity to introduce a new corporate identity that better represents our electronic medical record (EMR) system and also better defines the Company we are today with a broad range of system and service offerings. Therefore, in 2011, we also unveiled a new corporate logo and new website at www.cpsinet.com. The new logo is a reflection of both the continual advancement in system technology reflective of the CPSI EMR system and our broadened identity as a leading services provider to rural and community hospitals.

There has been no greater change in healthcare information technology than the national initiative towards electronic health record (EHR) adoption under the auspices of the American Recovery and Reinvestment Act of 2009 (ARRA). In 2011, successfully attesting to meeting the Stage One meaningful use criteria for EHR adoption and qualifying for the resulting payments for that achievement was the primary focus of many hospitals and providers and the healthcare IT industry.

As simply as I can put it, the success of our customers and our company in this effort has been overwhelming. We have established a clear advantage over our competition in the rural and critical access hospital market. Based on government data released on November 30th, of all hospitals nationally that have successfully attested using a complete EHR, 134 use the CPSI EMR system. This number represents 22% of the hospitals that have successfully attested and is more than the next three competitive vendors in the rural and community hospital space combined. Where critical access hospitals are concerned, the separation between CPSI and our competition is even greater. Of the 97 critical access hospitals listed in the data, 40 of those hospitals, or 41%, have attested using CPSI as the complete EHR, making us the leader, by far, for these hospitals. Our total of 40 represents more than our next six competitors combined.

Where payments are concerned, as part of our overall program in assisting our hospitals with meeting the meaningful use objectives, we are engaged with our clients all the way through the process to receipt of their funds after they attest. I am pleased to report that as of February 3, 2012, 109 of our clients had received payments totaling over $111 million. Based on the numerous communications from our clients after they have received their checks, I can say with confidence that the importance of these funds to our clients cannot be emphasized enough.

Amid great change, one thing that has not changed for CPSI in 2011 is the continuing quality of our financial performance. We have taken full advantage of the opportunities presented us with the EHR adoption initiative as well as continuing to grow and add to our services business. Business Management Services continues to perform well, and the growth of the Consulting and IT Managed Services offerings we started in 2010 has exceeded our expectations.

There is no doubt that the upcoming years will present additional challenges and changes for CPSI and our clients. We look forward to these opportunities to further solidify our position as the leading provider of EMR systems and services to rural and community hospitals. As always, we deeply appreciate your support and your investment.

Sincerely,

J. Boyd DouglasPresident and Chief Executive Officer

Letter to Shareholders:

Board of Directors

David A. DyeChairman and Chief Financial OfficerComputer Programs and Systems, Inc.

W. Austin Mulherin, IIIAttorneyFrazer, Greene, Upchurch & Baker, LLC

John C. JohnsonReal Estate AppraiserCourtney & Morris Appraisals, Inc.

J. Boyd Douglas, Jr.President and Chief Executive OfficerComputer Programs and Systems, Inc.

Charles P. HuffmanRetired Executive Vice President and Chief Financial OfficerEnergySouth, Inc.

Ernest F. Ladd, IIIRetired Executive Vice President and Chief Financial OfficerDravo Corporation

William R. Seifert, IIRetired Executive Vice PresidentRegions BankChairmanSouth Alabama Advisory Board of Regions Bank

Officers

J. Boyd Douglas, Jr.President and Chief Executive Officer

David A. DyeChief Financial Officer

Independent Registered Public Accounting FirmGrant Thornton LLP1100 Peachtree Street, Suite 1200Atlanta, GA 30309

Transfer AgentAmerican Stock Transfer & Trust Company, LLC6201 15th AvenueBrooklyn, NY 11219Toll free: (800) 937-5449Local & international: (718) 921-8124Email: info@amstock.comWeb site: www.amstock.com

Legal CounselMaynard, Cooper & Gale, P.C.1901 Sixth Avenue NorthSuite 2400, Regions/Harbert PlazaBirmingham, AL 35203-2618

Corporate HeadquartersComputer Programs and Systems, Inc.6600 Wall StreetMobile, AL 36695(251) 639-8100www.cpsinet.com

Common StockComputer Programs and Systems, Inc.’s common stock is traded on The NASDAQ Stock Market’s Global Select Market under the symbol “CPSI.”

Directors and Officers

Corporate Data

UNITED STATESSECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-KÈ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES

EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011

OR

‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIESEXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD FROM TO .

Commission file number: 000-49796

COMPUTER PROGRAMS AND SYSTEMS, INC.(Exact Name of Registrant as Specified in Its Charter)

Delaware 74-3032373(State or Other Jurisdiction ofIncorporation or Organization)

(I.R.S. EmployerIdentification No.)

6600 Wall Street, Mobile, Alabama 36695(Address of Principal Executive Offices) (Zip Code)

(251) 639-8100(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:Title of Each Class Name of Each Exchange on Which Registered

Common Stock, par value $.001 per share The NASDAQ Stock Market LLCSecurities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the SecuritiesAct. Yes ‘ No È

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of theAct. Yes ‘ No È

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes È No ‘

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of thischapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post suchfiles). Yes È No ‘

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, ora smaller reporting company. See the definitions of “large accelerated filer,” accelerated filer” and “smaller reportingcompany” in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated filer ‘ Accelerated filer È

Non-accelerated filer ‘ Smaller reporting company ‘(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of theAct). Yes ‘ No È

The aggregate market value of common stock held by non-affiliates of the registrant at June 30, 2011 was $658,281,189.As of March 9, 2012 the registrant had outstanding 11,063,220 shares of its common stock.

DOCUMENTS INCORPORATED BY REFERENCE IN THIS FORM 10-K:Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 10, 2012 are

incorporated by reference into Part III of this report.

TABLE OF CONTENTS

Item No. Page No.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . i

PART I1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Industry Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Our Solution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Our Products and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5System Implementation and Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Product Development and Enhancement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Customers, Sales and Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Health Information Security and Privacy Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Internal Management Control System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Company Website . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

PART II

5. Market for Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327. Management’s Discussion and Analysis of Financial Condition and Results of

Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 337A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . 448. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 459. Changes in and Disagreements with Accountants on Accounting and Financial

Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 689A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 689B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

PART III

10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . 7011. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7012. Security Ownership of Certain Beneficial Owners and Management and Related

Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7013. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . 7014. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

PART IV

15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

* Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 10, 2012are incorporated by reference in Part III of this Form 10-K.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the “safeharbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statementscan be identified generally by the use of forward-looking terminology and words such as “expects,”“anticipates,” “estimates,” “believes,” “predicts,” “intends,” “plans,” “potential,” “may,” “continue,” “should,”“will” and words of comparable meaning. Without limiting the generality of the preceding statement, allstatements in this Annual Report relating to estimated and projected earnings, margins, costs, expenditures, cashflows, growth rates and future financial results are forward-looking statements. We caution investors that anysuch forward-looking statements are only predictions and are not guarantees of future performance. Certain risks,uncertainties and other factors may cause actual results to differ materially from those projected in the forward-looking statements. Such factors may include:

• overall business and economic conditions affecting the healthcare industry;

• the potential effects of the federal health care reform legislation enacted in 2010, and implementingregulations, on the businesses of our hospital customers;

• the funding uncertainties associated with and potential expenditures required by the AmericanRecovery and Reinvestment Act of 2009 in connection with the adoption of electronic health records;

• saturation of our target market and hospital consolidations;

• changes in customer purchasing priorities, capital expenditures and demand for information technologysystems;

• competition with companies that have greater financial, technical and marketing resources than wehave;

• failure to develop new technology and products in response to market demands;

• failure of our products to function properly resulting in claims for medical losses;

• government regulation of our products and customers, including changes in healthcare policy affectingMedicare reimbursement rates;

• government regulation of the healthcare and health insurance industries;

• changes in accounting principles generally accepted in the United States of America;

• unpredictability of our quarterly operating results which may cause us to fail to meet earningsexpectations, causing our common stock price to fluctuate or decline;

• breaches of security and viruses in our systems resulting in customer claims against us and harm to ourreputation;

• potential intellectual property claims against us;

• general economic conditions, including changes in the financial markets that may affect the availabilityand cost of credit to us or our customers; and

• interruptions in our power supply and/or telecommunications capabilities.

For more information about the risks described above and other risks affecting us, see “Risk Factors”beginning on page 19 of this Annual Report. We also caution investors that the forward-looking informationdescribed herein represents our outlook only as of this date, and we undertake no obligation to update or reviseany forward-looking statements to reflect events or developments after the date of this Annual Report.

i

PART I

ITEM 1. BUSINESS

Overview

We are a healthcare information technology company that designs, develops, markets, installs and supportscomputerized information technology systems to meet the unique demands of small and midsize hospitals. Ourtarget market includes acute care community hospitals with 300 or fewer beds and small specialty hospitals, withour primary focus on hospitals with 100 or fewer acute care beds. Approximately 94% of our hospital customershave fewer than 100 acute care beds. We are a single-source vendor providing comprehensive software andhardware products, complemented by data conversion, complete installation, extensive support and informationtechnology management and professional services. Our fully integrated, enterprise-wide system automates themanagement of clinical and financial data across the primary functional areas of a hospital. In addition, weprovide services that enable our customers to outsource certain data-related business processes which we canperform more efficiently. We believe our products and services enhance hospital performance in the critical areasof clinical care, revenue cycle management, cost control and regulatory compliance. From our initial hospitalinstallation in 1981, we have grown to serve over 650 hospital customers across 45 states and the District ofColumbia. In 2011, we generated revenues of $173.5 million from the sale of our products and services.

Industry Dynamics

The healthcare industry is the largest industry in the United States economy, comprising approximately17.6% of the U.S. gross domestic product in 2009 according to the Centers for Medicare and Medicaid Services,or “CMS”. The CMS estimates that by fiscal 2019 total U.S. healthcare spending will reach $4.6 trillion, or19.6% of the estimated U.S. gross domestic product.

Hospital services represents one of the largest categories of total healthcare expenditures, comprising 30.5%of total healthcare expenditures in 2011 according to the CMS. According to the American Hospital Association,there are approximately 4,985 community hospitals in the United States that are in our target market of hospitalswith 300 or fewer acute care beds, with approximately 2,800 of those in our primary area of focus of 100 orfewer acute care beds. In addition, there is a market of small specialty hospitals that focus on discrete medicalareas such as surgery, rehabilitation and psychiatry.

Notwithstanding the size and importance of the healthcare industry within the United States economy, theindustry is constantly challenged by changing economic dynamics, increased regulation and pressure to improvethe quality of healthcare. These challenges are particularly significant for the hospitals in our target market due totheir more limited financial and human resources and their dependency on Medicare and Medicaid populationsfor a substantial portion of their revenue. However, we believe healthcare providers can successfully addressthese issues with the help of advanced medical information systems. Specific examples of the challenges andopportunities facing healthcare providers include the following.

Changing Economic Dynamics. Community hospitals typically generate a significant portion of theirrevenues from beneficiaries of the Medicare program. Consequently, even small changes in this federal programhave a disproportionately larger impact on community hospitals as compared to larger facilities where greaterportions of their revenues are typically generated from beneficiaries of private insurance programs. Medicarefunding and reimbursements fluctuate year to year and, with the anticipated growth in healthcare costs, willcontinue to be scrutinized as the federal government attempts to control the costs and growth of the program. TheMedicaid program, which is a federal/state program managed by the individual states and dependent in part onfunding from the states, also continues to struggle due to the increasing cost of healthcare and limited staterevenues. As the federal government seeks to limit deficit spending in coming years due to fiscal restraints, it willlikely continue to cut entitlement spending programs such as Medicare and Medicaid matching grants which willplace further cost pressures on hospitals and other healthcare providers. Furthermore, federal and state budget

1

shortfalls could lead to potential reductions in funding for Medicare and Medicaid. Reductions inreimbursements from Medicare and Medicaid could lead to hospitals postponing expenditures on informationtechnology. We expect that the demand for Medicare and Medicaid services will increase as a result of thecurrent challenging economic environment and high level of unemployment, and increasing age of the U.S.population. According to the American Hospital Association (AHA), a one percentage point increase inunemployment increases enrollment in Medicaid and Children’s Health Insurance Program (CHIP) byapproximately one million lives. With national unemployment at over 8 percent, significant pressure is being puton America’s hospitals as they struggle to serve the growing numbers of uninsured patients according to theAHA. Additionally, the uncertainty surrounding credit markets and tightened lending standards since 2007 haveincreased the costs to hospitals of borrowing money and made it more difficult to find the financing for necessaryfacility and technology improvements.

To compete in the continually changing healthcare environment, providers are increasingly using technologyin order to help maximize the efficiency of their business practices, to assist in enhancing patient care, and tomaintain the privacy of patient information. Healthcare providers are placing increased demands on theirinformation systems to accomplish these tasks. We believe that information systems must facilitate management ofpatient information across administrative, financial and clinical tasks. Information systems must also effectivelyinterface with a variety of payor organizations within the increasingly complex reimbursement environment.

The American Recovery and Reinvestment Act of 2009. On February 17, 2009, President Barack Obamasigned into law the American Recovery and Reinvestment Act of 2009 (the “ARRA”). This $787 billioneconomic stimulus package includes a number of health care policy provisions, including approximately $19billion in funding over a ten-year period for health information technology infrastructure and Medicare andMedicaid incentives to encourage doctors, hospitals, and other providers to use health information technology toelectronically exchange patients’ health information, through the development of health information exchanges(“HIE”) and the adoption of electronic health records (“EHR”). Approximately $2 billion of the total fundingamount is in appropriated funds for discretionary grants, loans and technical assistance programs designed to aidproviders with the adoption of EHR and the development of HIE. These funds are being disbursed by variousagencies within the Department of Health and Human Services, either directly to providers – including privatephysician offices – or to other entities like states or non-profit organizations. The remaining allocated amountswill take the form of Medicare and Medicaid payment incentives. The ARRA identifies four priority areas forspending with respect to health information technology: (1) establishing HIE; (2) EHR adoption; (3) workforcetraining; and (4) new technology research and development. In order to qualify for EHR funding, providers arerequired to connect to an HIE, which means funding is dependent on state action to establish HIEs. The paymentincentives started to become available to our customers in February 2011, and, as of January 2012, approximately109 of our hospital customers had received payments totaling more than $100 million for EHR adoption.

The ARRA includes payment incentives for critical access hospitals that are meaningful users of EHR.During December 2010, both our hospital and medical practice EHR solutions were certified as a complete EHRby the Certification Commission for Health Information Technology (CCHIT®). Receiving this certification forboth our hospital and ambulatory EHR products ensures that hospitals and other healthcare providers using ourEHR systems will be considered “meaningful users” of EHR and qualify for ARRA reimbursements. We believethat the ARRA and this certification of our EHR system will continue to have a positive impact during the nextfew years on our business and the businesses of the community hospitals that comprise our target market.

Continued Push for Improved Patient Care. With pressure mounting to reduce medical errors and improvepatient safety, hospitals are actively seeking information technology solutions for clinical decision support. Thismigration toward clinical decision support solutions is further supported by the ARRA. The provisions of theARRA offer incentives for hospitals to become meaningful users of EHRs through September 2015, and wealready have many hospital customers who have received these incentive payments as of February 2012.However, the ARRA incentive program is set to expire as of October 1, 2015, and hospitals and healthcareproviders which have not implemented EHRs with HIE connectivity will be penalized with lower Medicarepayment levels after that date.

2

While economic, regulatory and consumer pressures such as those described above have increased rapidlyover the last several years, we believe healthcare organizations have historically underinvested in informationtechnology and services compared to other industries. This underinvestment has caused healthcare providers torely on non-integrated, complex and inefficient information systems. A hospital’s failure to adequately invest inmodern medical information systems could result in fewer patient referrals, cost inefficiencies, lower thanexpected reimbursement, increased malpractice risk and possible regulatory infractions.

In the face of decreasing revenue and increasing pressure to improve patient care, healthcare providers arein need of management tools that (1) increase efficiency in the delivery of healthcare services, (2) reduce medicalerrors, (3) effectively track the cost of delivering services so those costs can be properly managed and(4) increase the speed and rate of reimbursement. Despite challenging economic conditions, we believe theindustry will increase its adoption of information technology as a management tool, particularly as a result of theARRA. We further believe these dynamics should allow for future revenue growth.

Our Solution

We have tailored an information technology solution that effectively addresses the specific needs of smalland midsize hospitals. Due to their smaller operating budgets, community hospitals have limited financial andhuman resources to operate manual or inefficient information systems. However, these hospitals are expected toachieve the same quality of care and regulatory compliance as larger hospitals, placing them in a particularlydifficult operating environment.

We believe that the CPSI solution meets this challenge. We provide fully integrated, enterprise-wide,HIPAA compliant medical information systems and services that collect, process, retain and report data in theprimary functional areas of a hospital, from patient care to clinical processing to administration and accounting.As a key element of our complete solution, we provide ongoing customer service through regular interaction withcustomers, customer user groups and extensive customer support. Further, we offer business managementservices that allow customers to avoid some of the fixed costs of a business office. We are capable of providing asingle-source solution for small and midsize hospitals, making us a partner in their initiatives to improveoperations and medical care.

Our customers continually communicate with us through our support teams and through organized usergroups, allowing us to continue to provide a state-of-the-art solution that meets their specific needs. Byremaining sensitive and responsive to the ever-changing demands of our customers and regularly updating ourproducts, we believe we provide an information technology solution that meets the needs of communityhospitals. Our business has continued to grow because we have successfully addressed the needs of communityhospitals for fully integrated, enterprise-wide information systems that allow them to improve operatingeffectiveness, reduce costs and improve the quality of patient care.

In November 2010, we formed a new information technology management and professional servicesbusiness unit. With the federal government’s healthcare agenda focused on adopting electronic health records,community hospitals are faced with a significant undertaking in implementing EHR technology. As a result, werecognize that it makes sense for many of our customers to rely on third-party service organizations to help themidentify their IT objectives, define the best way to meet those requirements and manage the resulting projects andassociated technologies. Our current offerings in this area include a comprehensive suite of services, includingnetwork management and monitoring, server and storage management, hosted email, firewall management,malware protection, data center services, help desk solutions and other services. Professional engagements suchas IT staffing, IT infrastructure assessment and project management for clinical point of entry (CPOE)implementation, meaningful use achievement of EHR and others are individually customized to meet specificclient requirements.

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Strategy

Our objective is to continue to grow as a leading provider of healthcare information technology systems andservices to small and midsize hospitals by following the same strategy that we have successfully pursued for overthirty years, the key elements of which are described below.

Deliver a Single-Source Solution. When a customer purchases the CPSI system, we provide everythingnecessary for the customer to implement and use our system. We deliver the application software, computerhardware, peripherals, forms and supplies used in the comprehensive information network. Our installation teamswork extensively with each customer to convert existing data to the new system, to install all of the necessaryequipment and to train hospital personnel to use our system. After installation, our support teams answer andaddress customer questions and issues related to any aspect of the system. We also offer customers additionalservices such as business office management, electronic billing and ISP services. We believe our single-sourceapproach to delivering a complete information system makes our system easier and more convenient forcustomers to understand and manage, which results in greater customer satisfaction and retention.

Provide Enterprise-Wide, Fully Integrated Software Applications. We have developed all of our softwareproducts internally as part of our fully integrated system architecture. Our experience has taught us that using afully integrated system in the primary functional areas of a hospital ensures compatibility among applications andavoids pitfalls associated with interfacing disparate systems. Our system utilizes one central database whereinformation is stored and used by all of our software applications. With our single database model, our systemsprovide secure, real-time access to all information across multiple applications for all those needing such access,including physicians, nurses, laboratory technicians, pharmacists, clinicians and other users. The enterprise-wide,fully integrated nature of our system also allows customers to monitor user access to information for purposes ofcompliance with federal and state privacy regulations.

Maintain Commitment to Customer Oriented Operating Philosophy. A key factor in our success has beenour focus on customer service and support. We make available to our customers experienced support teams thatcan assist with any question or problem. We currently have close to a one to one support staff to customer ratio.Our support teams are extensively trained, and our employees are generally promoted from within so that theyhave a thorough knowledge of our system and a commitment to our culture. Because all of our customers use thesame version of our system, our support teams can be more effective by maintaining a complete understanding ofa single system. As part of our commitment to system support, we actively solicit customer feedback regardingways in which we can improve the effectiveness and efficiency of our systems. To further this goal, we haveorganized our customers into a national user group to promote the exchange of information regarding our systemand to identify product enhancements based on our customers’ operational experiences. We believe our usergroup concept is a key component of our success by positively impacting customer satisfaction and retention andby enhancing product development and system functionality. We will continue to focus on our national usergroup as a key component to our goal of maintaining and growing our customer base and market share.

Expand Presence in Target Market. We will continue to target small domestic hospitals of 100 or feweracute care beds, as well as expand our presence in midsize hospitals of 300 or fewer acute care beds. We believethe market of approximately 2,800 small hospitals nationwide has been traditionally overlooked and underservedby other healthcare technology companies. In addition, a number of our customers are small specialty hospitalsthat focus on discrete medical areas such as surgery, rehabilitation and psychiatry. We intend to continue gainingcustomers from this market segment. Our system can help these smaller hospitals reduce costs and increase theiroperating efficiencies. We believe our personalized marketing approach and emphasis on customer relationshipsare attractive to the management of these hospitals. We also believe our system is well-suited to hospitals of thissize because they typically demonstrate a greater commitment than larger hospitals to the concept of anenterprise-wide, fully integrated system. In addition, we will continue to sell additional services and softwareproducts to our existing customers who have not purchased our complete package of services and softwareapplications.

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Emphasize Recurring Revenue Opportunities. In addition to revenues from new system installations, wehave developed and will continue to develop sources of recurring revenues. Our current principal source ofrecurring revenues is our support and maintenance fees paid by existing customers. As our customer base grows,our recurring revenues from support and maintenance fees should also grow. We believe recurring revenues willalso continue to increase from our business management services and information technology management andprofessional services, which we market to our existing customers as well as new customers. Our businessmanagement services include electronic billing, patient statement processing, accounts receivable management,payroll processing, ISP services and web site hosting. Our information technology management and professionalservices include managed network services, server and storage management, and desktop support, as well ascommunications, connectivity, security and data center services. We also provide our software products on a“Software as a Service” or “SaaS” basis. When we provide SaaS services, we maintain a customer’s computerserver in our facility and provide our system to the customer through remote access. Instead of the one-timesystem purchase price, these customers pay a monthly fee for the term of the SaaS customer agreement,generating recurring revenues.

Our Products and Services

New Products

We released version 18 of the CPSI system in 2011. With this release, the CPSI system converted to a newoperating platform. The new system platform features a Linux operating system, an open source SQL compliantdatabase, Java, and a cross-platform user interface. This platform allows CPSI to provide its customers with anextensive range of capabilities to enhance information technology operations and implement other newcomplementary technologies, such as rules-based customization and access from iOS, Android, Windows, Macand Linux-based devices. Additionally, with the version 18 release, the CPSI system became iPad compatible.

We also released our Physician documentation applications (Physdoc) in 2011. Physician documentationprovides a flexible, easy-to-use documentation of all aspects of the physician/patient encounter to maximizeworkflow efficiency, enhance clinical decision making, and substantiate billing for services rendered. Thiselectronic documentation puts all relevant patient information in one place, so physicians can easily accessclinical data along side their own diagnostic and therapeutic notes. It offers a full array of documentation featuresand methodologies, including free-text entry, pre-designed templates with narrative output, integration with voicerecognition software, and a library of medical mark-up images with automatic notation. Physdoc is alsointegrated with clinical applications to allow for inclusion of diagnostic results, patient clinical data, patientdiagnosis, medications and orders as part of documentation, and for electronic signing and amending ofdocumentation with versioning of documents. We feel that our Physdoc application promotes compliance withregulatory standards while assisting in optimizing reimbursement for services provided and decreasesmalpractice exposure through specific and clearly recorded diagnostic and therapeutic notes.

Software Systems

We offer a full array of software applications designed to streamline the flow of information to the primaryfunctional areas of community hospitals in one fully integrated system. We intend to continue to enhance ourexisting software applications and develop new applications as required by evolving industry standards and thechanging needs of our customers. Pursuant to our customer support agreements, we provide our customers withsoftware enhancements and upgrades periodically on a when-and-if-available basis. See “Support andMaintenance Services.” These enhancements enable each customer, regardless of its original installation date, tohave the benefit of the most advanced CPSI products available. Our software applications:

• provide automated processes that improve clinical workflow and support clinical decision-making;

• allow healthcare providers to efficiently input and easily access the most current patient medical data inorder to improve the quality of care and patient safety;

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• integrate clinical, financial and patient information to promote efficient use of time and resources,while eliminating dependence on paper medical records;

• provide tools that permit healthcare organizations to analyze past performance, model new plans forthe future and measure and monitor the effectiveness of those plans;

• provide for rapid and cost-effective implementation, whether through the installation of an in-housesystem or through our SaaS services; and

• increase the flow of information by replacing centralized data over which there is limited control withbroad-based, secure access by clinical and administrative personnel to data relevant to their functionalareas.

Our software applications are grouped for support purposes according to the following functional categories:

• Patient Management

• Financial Accounting

• Clinical

• Patient Care

• Enterprise Applications

Due to the integrated nature of the CPSI system, our software applications are not marketed as distinctproducts, and our sales force attempts to sell all applications to each customer as a single product. Newcustomers must purchase from us and have installed the core applications of patient management and financialaccounting and all hardware necessary to run these applications. In addition to the core applications, customersmay also purchase one or more of our clinical, patient care and enterprise applications. Over one-third of ourcustomers have purchased a combination of applications that meet their enterprise-wide information technologyneeds.

The general functional categories, as well as the software applications in each of these categories, aredescribed below.

Patient Management. Our patient management software enables a hospital to identify a patient at any pointin the healthcare delivery system and to collect and maintain patient information throughout the entire process ofpatient care on an enterprise-wide basis. The single database structure of our software permits authorized hospitalpersonnel to simultaneously access appropriate portions of a patient’s record from any point on the system. Thepatient management software performs the following functions:

Registration • records patient admissions, discharges and transfers

• manages patient status, room assignments and recurring charges

• keeps information available to all hospital personnel in formatsdesigned for their particular requirements

Patient Accounting • records patient charges and maintains accounts receivableinformation including aging, service charges and cash receipts

• generates and processes insurance claims

Health InformationManagement

• supports the operational needs of the modern medical recordsdepartment including transcription, case indexing/abstracting andstatistical reporting

• tracks deficiencies in a patient’s chart and provides chart locationinformation

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Patient Index • maintains a master index of hospital patients and providesimmediate online access to patient financial and medical dataassociated with a patient stay

Electronic ClaimsProcessing

• provides a computer-to-computer link with intermediaries forMedicare and other payers for the submission of claims

Medical PracticeManagement

• supports patient account management and insurance processingfor single and multiple practices/clinics

• supports both hospital-based and remote practices/clinics

We also offer the following optional products that may be purchased as part of our core patient managementsuite:

Enterprise WideScheduling

• maintains all patient scheduling information

Contract Management • tracks patients enrolled in managed care plans and conformsbilling functions to such plans

Quality Improvement • automates hospital-wide total quality management and reportingrequirements for utilization activity, risk management, infectionsurveillance and all accreditation review functions

Financial Accounting. Our financial accounting software provides a variety of business office applicationsdesigned to efficiently track and coordinate information needed for managerial decision-making. Our financialaccounting software:

Executive InformationSystem

• summarizes daily financial transactions regarding patientrevenues, receipts, census statistics and billing information forready access by hospital administrators

General Ledger • provides timely, accurate financial information generated fromdaily hospital operations

• formats financial statements to the specifications of each user andis able to generate up to 999 different user-defined reports

Accounts Payable • processes vendor invoices and payments and their related generalledger entries

Payroll/Personnel • calculates all employee wages and benefits for an unlimitednumber of salaried and hourly employees

• allocates employee time to user-defined cost centers

Time and Attendance • uses touch screen time clocks to eliminate manual time entry

• reduces effort of gathering employee time data and increasesaccess of managers to such data

• makes time records more accurate by identifying employeesthrough bar-coding and optional biometric fingerprint technology

Electronic DirectDeposits

• provides for computerized bank deposits to meet payroll andaccounts payable needs

Human Resources • provides for computerized employee files through document/image scanning and data entry

• allows for complete tracking of benefits and other employee datathrough a variety of user-defined reports

• tracks job applicant information to assist in the employeerecruiting and hiring process

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Budgeting • allows for complete online budget preparation throughcomputerized access to historical data

Fixed Assets • allows access to information regarding hospital assets includinglocations and depreciation scheduling

Materials Management • tracks the flow of materials throughout the hospital

• automates the process of inventory control, materials purchasing,stock requisitions and patient charging

Clinical. Our clinical software automates record keeping and reporting for many clinical functions includinglaboratory, radiology, physical therapy, respiratory care, and pharmacy. These products eliminate tediouspaperwork, calculations and written documentation while allowing for easy retrieval of patient data and statistics.Our clinical software:

Laboratory InformationSystems

• provides an interface to laboratory analytical instruments in orderto transfer results to nurse stations, mobile point-of-care systemsand remote physician offices

• allows users to receive orders from any designated location,process orders and report results, and maintain technical,statistical and account information

Laboratory InstrumentInterfaces

• provides an automated solution for reviewing test results andcompleting patient orders

• reduces the amount of required manual data entry therebyreducing the likelihood of human error

• reduces time to process laboratory specimens

Radiology InformationSystems

• includes flash card printing, patient scheduling, transcription,patient indexing by X-Ray film number, film tracking andlocation

• receives patient data, patient locations and otherinterdepartmental communications support

ImageLink® • provides a complete picture archiving and communicationssystem (PACS) with comprehensive functionality designed to fitseamlessly with our other applications

• allows the realization of an electronic medical record completewith diagnostic images

• provides physicians real-time access to diagnostic images via theinternet through ChartLink®.

Physical Therapy andRespiratory Care

• communicates to nursing the appropriate procedures and patientpreparation instructions from orders entered into the CPSI system

• keeps a journal of the orders received and processed

• handles a variety of processing tasks after a patient order isreviewed

• allows a department to customize its results to be sent back tonursing

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Pharmacy • allows the hospital pharmacist to enter and fill physician orders

• performs all of the functions related to patient charging, generalledger upgrading, re-supply scheduling and inventory reduction/statistics maintenance

• improves patient care by monitoring drug/drug and food/druginteractions, allergy contraindications, dosage ranges andduplicate therapy

• produces drug education information for each patient in an easy-to-read format

Patient Care. Our patient care applications allow hospitals to create computerized “patient files” in place ofthe traditional paper file systems. This software enables physicians, nurses and other hospital staff to improve thequality of patient care through increased access to patient information, assistance with projected carerequirements and feedback regarding patient needs. Our software also addresses current safety initiatives in thehealthcare industry such as the transition from written prescriptions and physician orders to computerizedphysician order entry. Our patient care software:

Order Entry / ResultsReporting

• provides efficient order and result communication

• automates the entry of patient charges

• reduces “lost” charges and mistakes due to legibility

• increases efficiency of nursing stations

• provides interactive, real time status reports for orders

Point-of-Care System • allows nurses to enter patient data into the network at thepatient’s bedside thereby eliminating the duplicate entry ofinformation

• utilizes touch-screen and wireless technology

• makes patient information instantly available throughout theentire hospital System

Patient Acuity • categorizes patients according to an assessment of the acuity ofthe illness, severity of the symptoms, and projected nursingdependency

• allows nurses to project the total character and amount of carethat should be provided to each patient

ChartLink® • provides physicians with a secure and interactive portal to patientinformation through a hospital’s website

• optional computerized physician order entry, including the abilityto enter medication, ancillary test and treatment orders

Medication Verification • verifies the accuracy of patient medication orders at a patient’sbedside by comparing scans of patient and medication bar codesagainst the medication orders and history for that patient

• screens medication orders for possible patient allergies and/ordrug interactions

Resident AssessmentInstruments

• allows nursing staff to complete time consuming residentreporting requirements in an expeditious and efficient manner

• generates nursing care plans based on deficiencies in the residentreports

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Medical Practice EMR • provides medical practices and clinics with a complete CCHITSM

certified electronic medical record

• supports patient account management and insurance processing forsingle and multiple practices/clinics

• automates medical practice workflow with an interactive whiteboard, template driven documentation, image capture/documentscanning, and an integrated Superbill

• integrated with CPSI’s ChartLink® EMR portal, the moduleprovides immediate and secure access to the patient’s completeambulatory and inpatient history

• supports both hospital-based and remote practices/clinics

• supports patient account management and insurance processing forhome health agencies

• provides complete, regulatory compliant home care tracking

• provides for remote in-home documentation of care

Outreach ClientAccess

• provides the hospital’s outreach clients, such as physicians, theiroffice administrators, nursing homes, home health agencies, andlocal businesses, with remote access to online, real-time, securepatient data as needed and appropriate for each outreach client

• available information includes insurance and billing information,diagnosis and procedure coding, discharge summaries, pharmacyprofiles and other clinical and administrative information

Electronic Forms • electronic form templates replace paper-based records and careforms

• completed forms become a permanent part of the patient’selectronic medical record

PhysicianDocumentation

• electronic documentation of all aspects of physician/patientencounter

• documentation is integrated with clinical applications to allowinclusion of diagnostic results, patient clinical data, patientdiagnosis, medications and orders

• promotes compliance with regulatory standards while assisting inoptimizing reimbursement for services provided

Enterprise Applications. We provide software applications that support the products described above and areuseful to all areas of the hospital. These applications include: ad hoc reporting, automatic batch and real-timesystem backups, an integrated fax system, archival data repository, document scanning and Microsoft Officeintegration and an Application Portal. The Application Portal allows clients to access our applications remotelyvia Microsoft Internet Explorer and the Internet without requiring the loading of any additional client software onthe accessing PC. User information and data accessed is secured with HIPAA compliant 128 bit cipher strengthSecure Socket Layer (SSL) encryption. Remote access using the Application Portal results in no discernabledifference to the user in software functionality.

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Support and Maintenance Services

After a customer installs a CPSI system, we provide software application support, hardware maintenance,continuing education and related services pursuant to a support agreement. The following describes servicesprovided to customers using CPSI systems.

Total System Support. We believe the quality of continuing customer support is one of the most criticalconsiderations in the selection of an information system provider. We provide hardware, technical and softwaresupport for all aspects of our system which gives us the flexibility to take the necessary course of action toresolve any issue. Unlike our competitors who use third-party services for hardware and software support, weprovide a single, convenient and efficient resource for all of our customers’ system support needs. In order tominimize the impact of a system problem, we train our customer service personnel to be technically proficient,courteous and prompt. Because a properly functioning information system is crucial to a hospital’s operations,our support teams are available 24 hours per day to assist customers with any problem that may arise. Customerscan also use the Internet to directly access our support system. This allows customers to communicateelectronically with our support teams at any time. With over 600 employees who provide customer service andsupport, we currently have close to a one-to-one support staff to customer ratio.

User Group. All of our customers have the opportunity to be members of our user group from which wesolicit feedback regarding our products. We host a national user group meeting annually. We have also organizedseveral active regional user groups which meet on a semi-annual basis. These groups meet to discuss andrecommend product modifications and improvements which they then evaluate and prioritize. Upon confirmingthat the desired improvements are technically feasible, we agree to allocate a significant amount of programmingtime each year to undertake the requested modification or improvement. The majority of our productenhancements originate from suggestions from our customers that we receive through the user group structure.

Software Releases. We are committed to providing our customers with software and technology solutionsthat will continue to meet their information system needs. To accomplish this purpose, we continually work toenhance and improve our application programs. As part of this effort, for each customer covered under ourgeneral support agreement, we provide software updates as they become available at no additional cost. Wedesign these enhancements to be seamlessly integrated into each customer’s existing CPSI system. The benefit ofthese enhancements is that each customer, regardless of its original installation date, uses the most advancedCPSI software available. Through this process, we can keep our customers up-to-date with the latest operationalinnovations in the healthcare industry as well as with changing governmental regulatory requirements. Anotherbenefit of this “one system” concept is that our customer service teams can be more effective in responding tocustomer needs because they maintain a complete understanding of and familiarity with the one system that allcustomers use.

Purchasing a new information technology system requires the expenditure of a substantial amount of capitaland other resources, and many customers are concerned that these systems will become obsolete as technologychanges. Our periodic product updates eliminate our customers’ concerns about system obsolescence. We believeproviding this benefit is a strong incentive for potential customers to select our products over the products of ourcompetitors.

Hardware Replacement. As part of our general support agreements, we are also committed to promptlyreplacing malfunctioning system hardware in order to minimize the effect of operational interruptions. Byoffering all hardware used in our system, we believe we are better able to meet and address all of the informationtechnology needs of our customers.

Software as a Service. In some circumstances, we offer SaaS services to customers via remote accesstelecommunications. As an application service provider, we store and maintain computer servers dedicated tospecific customers which contain all of such customers’ critical patient and administrative data. These customersaccess this information remotely through direct telecommunications connections with these servers. Customersmay also elect to have their servers located on site at the hospitals.

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Internet Service Provider. As part of our total information solution, we can provide Internet connectionservices to our customers. We also can provide web-site design and hosting services.

Forms and Supplies. We offer our customers the forms that they need for their patient and financial records,as well as their general office supplies. Furnishing these forms and supplies helps us to achieve our objective ofbeing a one-source solution for a hospital’s complete healthcare information system requirements.

Managed Network Services. We offer comprehensive support for LAN, WLAN, WAN and VPNinfrastructures for those customers needing assistance with their data networks. Security updates, hardwaresupport, network monitoring, wireless access management, VPN and private point-to-point connectivitymanagement and monitoring solutions can be subscribed to based on the client’s unique needs.

Server and Storage Management. We offer complete management of CPSI installed server and storagetechnology, including monitoring, administration, and change management solutions to enhance clientavailability strategies for those important assets.

Desktop Support. We offer timely support for desktop hardware, operating systems, select applicationsoftware and peripheral devices. Desktop support offerings can help expedite problem resolution and ensureemployees are not hindered by technology obstacles.

Communications Solutions. We offer a robust set of fault tolerant communications hosting solutions forwebsites; electronic mail, Blackberry Exchange Server, and DNS services.

Connectivity Solutions. We provide a variety of solutions to help ensure clients can stay connected to theInternet in remote locations, including MPLS, Metro-E, DSL, DS-1, DS-3 and other options.

Security Services. We offer complete solutions for protecting the integrity of information systems andkeeping system security compliant with Federal law, including HIPAA privacy and security requirements.Solutions for malware (anti-virus protection), Internet content filtering, and firewall administration can all beprovided through CPSI’s offerings.

Data Center Services. We offer a SOC 1 accredited data center to house and manage client servers andstorage technologies. Solutions for managing these environments and the provision of other data center services,such as disaster recovery co-location and remote testing services, are available.

Business Management Services

Electronic Billing. We provide electronic billing for customers at prices competitive with other electronicbilling vendors. Once a customer processes patient insurance claims in our system, we then perform theelectronic billing function with no other participation by hospital staff. With this service, customers need notprepare billing files or maintain interfaces with third-party software, thereby saving the customer both time andmoney.

Statement Processing. Our customers may choose to have us prepare and distribute all patient billingstatements. We use our knowledge of a customer’s collection system to produce statements without requiring anyactions on the part of the hospital data processing personnel. Because we can connect directly with a customer’ssystem, the customer is not required to build and transfer files to us. All system enhancements are incorporatedinto the statement process without having to modify any third-party vendor interface. Similar to electronicbilling, this service saves the customer both time and money.

Accounts Receivable Management. We offer customers the option of using us to perform their patientbilling functions and accounts receivable management. Using this service allows customers to reduce costs byemploying fewer full time administrative employees.

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Payroll Processing. We offer customers the option of using us to perform their payroll functions, includingpayroll processing, tax and deduction management, and quarterly and yearly reporting.

Contract Management. We offer customers the option of using us to perform audits of payments from thirdparty insurers with which a customer executes managed care contracts to ensure payments are made inaccordance with the agreed upon metrics.

Insurance Services. We offer customers the option of using us to provide insurance services to includeInsurance Follow-up, Claim Eligibility Checking, Claim Status Checking, Pharmacy Online Adjudication, andMedical Necessity Database Updates. Using these services allows customers to improve their revenue cyclemanagement by reducing the incidents of invalid claims and monitoring the progress of valid claims.

System Implementation and Training

Conversion Services. When a customer purchases our system, we convert its existing data to the CPSIsystem. Our knowledge of hospital data processing, in conjunction with extensive in-house technical expertise,allows us to accomplish this task in a cost effective manner. When we install a new system, the data conversionhas already occurred so that the system is immediately operational. Our goal is for each customer to beimmediately productive in order not to waste time and money on the costly and inefficient task of maintainingthe same data on parallel systems. Our services also relieve the hospital staff of the time-consuming burden ofdata conversion.

Training. In order to integrate the new system and to ensure its success, we spend approximately threeweeks providing individualized training on-site at each customer’s facility at the time of installation. We directlytrain all hospital users, including staff members and healthcare providers, during all hospital shifts in the use ofhardware and software applications. In contrast, some of our competitors train only a hospital’s training staff atan off-site location. We employ nurses and medical technicians in addition to our technical training staff in orderto help us communicate more effectively with our customers during the training process.

Technology

Operating Systems and Server Platform. Our system platform features a Linux operating system, an opensource SQL compliant database, Java, and a cross-platform user interface (UI). This platform allows CPSI toprovide its customers with an extensive range of capabilities to enhance IT operations and implement other newcomplementary technologies such as rules-based customization and access from iOS, Android, Windows, Macand Linux-based devices. The SQL compliant database allows CPSI to efficiently mine the mass of clinical databeing captured by a hospital EMR system to meet both their internal demands and regulatory and interoperabilityrequirements.

ClientWare® Networking. Our ClientWare® application integrates the Linux system with Microsoftoperating systems. This integration brings together the strengths of both operating environments. The processingpower of Linux combined with the communication capabilities of Microsoft Windows creates an informationsystem that allows the use of familiar “point and click” processing. This architecture also facilitates integration ofother Microsoft software and provides expanded opportunities for the inclusion of new technologies withoutsacrificing system reliability or performance. Our updated version of ClientWare, CW5, will feature Java5

programming which will allow for easy interface with and access to a wide range of devices and applications.

Wireless Technology. Traditional workstations were designed around access to electrical and networkoutlets. We now use wireless networking technology to connect computers to the CPSI system. This allowscustomers to use mobile computers and to place stationary computers in locations for optimum convenience andease of use. We incorporate wireless laptop and hand held computers into our system. Convenient to carry anduse, these mobile computers allow effective data collection and real-time access to patient information frompractically anywhere in the hospital. Information efficiently collected will then be more quickly accessible byother caregivers throughout the hospital.

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Point-of-Care Stations. We use “point-of-care stations” which allow nurses to enter information into thesystem at a patient’s bedside. These stations consist of compact computers on individual data entry stations thatare lightweight, durable and easy to maneuver. We incorporate our wireless networking capabilities into thesestations in order to provide extended range and mobility.

Touch Sensitive Displays. Data entry is made easier through the use of touch sensitive displays. With thistechnology, work areas are free of the traditional keyboard and mouse associated with most personal computers.Touch screens are also more efficient for users who are not proficient in computer skills.

Biometric Recognition. As unique as each individual, a fingerprint cannot be duplicated, making it one ofthe most secure methods of verifying a person’s identity. Because of the sensitivity of healthcare information andfederal security requirements, we have incorporated licensed fingerprint identification technology as an optionfor our systems. When a user signs on to the system, he or she must scan his or her fingerprint as well as enter atraditional password. The system rapidly responds with the confirmation or rejection of the user’s identity.

Product Development and Enhancement

We are continually working to improve and enhance the CPSI system and to develop new products andservices for our system. The primary source of ideas for improvements to our products and services comes fromour customers, which submit suggestions to us through our national user group. We believe our interaction withcustomers and their communication with each other is the most efficient way to learn about and respond tochanges in the healthcare operating environment. This approach to research and development allows us toquickly adapt to technology advances and improve our products and services to better serve the needs of ourcustomers. Our management and customer support and service teams play a significant role in productdevelopment by continually monitoring the needs and desires of our customers and our market. In addition to ourcustomer support and service teams a Product Development Services division was created in 2008. This divisionis responsible for the development, quality assurance/testing, documentation, and distribution of all applicationsoftware. By consolidating all of our development efforts under a single division, we can ensure standardizationin our software development processes and effective utilization of our resources. We currently have 147employees in our Product Development Services division, including 7 research and development employeeswhose dedicated function is to develop new uses for and applications of technology available in the marketplace.

Customers, Sales and Marketing

Target Market. The target market for our information system consists of small and midsize hospitals of 300or fewer acute care beds, with a primary focus on hospitals with 100 or fewer acute care beds. In the UnitedStates, there are approximately 5,000 hospitals with 300 or fewer acute care beds, with approximately 2,800 ofthese having 100 or fewer acute care beds. In addition, we market our products to small specialty hospitals in theUnited States that focus on discrete medical areas such as surgery, rehabilitation and psychiatry. As ofFebruary 29, 2012, we had installed our system in over 650 facilities in 45 states and the District of Columbia.Approximately 94% of our existing customers are hospitals with 100 or fewer acute care beds, whileapproximately 99% of our existing customers are hospitals with 200 or fewer acute care beds. Our goal is toincrease sales to hospitals with 100 to 300 acute care beds while continuing to increase our market share andcompetitive position in the under 100 acute care bed market segment.

Sales Staff. Most of our new customers are referrals from our existing customers, thereby reducing the needfor a large sales force. Currently, we have 38 employees dedicated to direct sales, 19 of whom concentrate onnew prospects, and 19 of whom are responsible for the sale of additional products and services to existingcustomers. We hire our sales representatives from our existing employees. Our current sales representatives havean average of over 17 years of experience with the company, including experience in installation, training andcustomer support. Our sales representatives have defined geographic territories in the United States in which totarget new customers. A significant portion of the compensation for all sales personnel is commission based.

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Marketing Strategy. Our primary marketing strategy is to generate referrals from our existing customers anddirectly solicit potential users through presentations at industry seminars and trade shows. We also advertise invarious healthcare industry trade publications. For hospitals that we have targeted as potential customers, most ofour direct sales efforts involve site visits and meetings with hospital management. The typical sales cycle of ahealthcare information system usually takes six to eighteen months from the time of initial contact to the signingof a contract. Therefore, we believe it is important for our sales staff to dedicate a substantial amount of time andenergy to building relationships with potential new customers. We do not conduct extensive marketing activitiesand promotions because hospitals are easily identified, finite in number and generally send a request for proposalto vendors when they contemplate the purchase of a hospital information system.

Competition

The market for our products and services is competitive, and we expect additional competition fromestablished and emerging companies in the future. Our market is characterized by rapidly changing technology,evolving user needs and the frequent introduction of new products. We believe the principal competitive factorsthat hospitals consider when choosing between us and our competitors are:

• product features, functionality and performance;

• level of customer service and satisfaction;

• ease of integration and speed of implementation;

• product price;

• knowledge of the healthcare industry;

• sales and marketing efforts; and

• company reputation.

Our principal competitors are Medical Information Technology, Inc., or “Meditech,” Healthland, andHealthcare Management Systems, Inc., or “HMS.” Meditech, Healthland and HMS compete with us directly inour target market of small and midsize hospitals. These companies offer products and systems that arecomparable to our system and address the needs of hospitals in the markets we serve.

Our secondary competitors include McKesson Corporation, Quadramed Corp., Cerner Corporation, QualitySystems, Inc. and Siemens Corporation. These companies are significantly larger than we are, and they typicallysell their products and services to larger hospitals outside of our target market. However, they will sometimescompete directly with us. Our secondary competitors also include Prognosis Health Information Systems LLC,which is smaller than us.

We also face competition from providers of practice management systems, general decision support anddatabase systems and other segment-specific applications, as well as from healthcare technology consultants.Any of these companies as well as other technology or healthcare companies could decide at any time tospecifically target hospitals within our target market.

A number of existing and potential competitors are more established than we are and have greater namerecognition and financial, technical and marketing resources than we have. Products of our competitors may havebetter performance, lower prices and broader market acceptance than our products. We expect that competitionwill continue to increase.

Health Information Security and Privacy Practices

The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) is a federal law that affects theuse, disclosure, transmission and storage of individually identifiable health information, referred to as “protectedhealth information,” and that was enacted for the purpose of, among other things, protecting the privacy and

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security of protected health information. As directed by HIPAA, the Department of Health and Human Services(“DHHS”) has promulgated standards and rules for certain electronic health transactions, code sets, data security,unique identification numbers and privacy of protected health information. DHHS has issued some of these rulesin final form, while others remain in development. HIPAA and the standards promulgated by DHHS apply tocertain health plans, healthcare clearinghouses, and healthcare providers (referred to as “covered entities”), whichincludes our hospital customers. The Health Information Technology for Economic and Clinical Health Act(“HITECH Act”), which was enacted as part of the ARRA in 2009, significantly expanded HIPAA by extendingthe security standards of HIPAA to “business associates” of healthcare providers that are covered entities. Underthe HITECH Act, business associates are required to establish administrative, physical and technical safeguardsand are subject to direct penalties for violations. Our business management services activities frequently entail usacting in the capacity of a business associate to the hospitals that we serve, and therefore we are covered by thepatient privacy and security standards of HIPAA and subject to oversight by DHHS. We believe that we havetaken all necessary steps to comply with HIPAA, as it applies to us as a business associate, but it is important tonote that DHHS could, at any time in the future, adopt new rules or modify existing rules in a manner that couldrequire us to change our systems or operations.

Internal Management Control System

We have developed and maintain an automated enterprise management system which permits us to managenot only all of our internal management, accounting and personnel functions, but also all information relating toeach customer’s information system. Our system maintains detailed records of all information regarding eachcustomer’s system, including all system specifications, service history and customer communications, amongother things. This internal control system helps us to more effectively respond to customer support needs throughcomplete and current system information and through situation-based problem solving.

Intellectual Property

We regard some aspects of our internal operations, software and documentation as proprietary, and relyprimarily on a combination of contract and trade secret laws to protect our proprietary information. We believe,because of the rapid pace of technological change in the computer software industry, trade secret and copyrightprotection is less significant than factors such as the knowledge, ability and experience of our employees,frequent software product enhancements and the timeliness and quality of support services. We cannot guaranteethat these protections will be adequate or that our competitors will not independently develop technologies thatare substantially equivalent or superior to our technology.

We do not believe our software products or other CPSI proprietary rights infringe on the property rights ofthird parties. However, we cannot guarantee that third parties will not assert infringement claims against us withrespect to current or future software products or that any such assertion may not require us to enter into royaltyarrangements or result in costly litigation.

Employees

As of February 29, 2012, we had 1,341 employees, almost all of whom are located at our offices in Mobileand Lanett, Alabama and Monroe, Louisiana. Our employees can be grouped according to the following generalcategories: 618 in software services and support, 347 in business management services, 126 in informationtechnology services and support, 156 in product development services, 50 in sales and marketing and 44 inadministration. Our general practice is to recruit recent college graduates for entry-level positions and thenpromote these individuals within the organization to fill vacancies in higher positions. We also hire nurses andother medically-trained professionals in connection with our support services.

Since 1991, we have maintained a non-qualified discretionary profit-sharing plan under which all full-timeemployees with three years of uninterrupted service are eligible to participate, other than executive officers andcommissioned salespeople. The plan is designed to provide each eligible employee with periodic cash bonuses

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based on our profitability. Each eligible employee receives a pro rata share of the amount of cash distributedunder the profit-sharing plan based on the amount of their base salary compared to the sum of the salaries of allparticipating employees. Our profit-sharing plan is not a qualified plan for tax purposes or a guaranteed benefit.Contributions to the plan are made periodically at the discretion of the Board of Directors. During 2011, wedistributed approximately $3.4 million under this profit-sharing plan. We plan to continue to make distributionsunder this plan based on our profitability.

We are fortunate to have a high rate of employee retention, with our senior management having an averagetenure in excess of 18 years. Our performance depends in significant part on our ability to attract, train and retainhighly qualified personnel. None of our employees are represented by a labor union, and we believe our relationswith our employees are good.

Executive Officers

The executive officers of CPSI serve at the pleasure of the Board of Directors. Set forth below is a list of thecurrent executive officers of CPSI and a brief explanation of their principal employment during the last five(5) years.

J. Boyd Douglas – President and Chief Executive Officer. J. Boyd Douglas, age 45, has served as ourPresident and Chief Executive Officer since May 2006. He was elected as a director in March 2002. Mr. Douglasbegan his career with us in August 1988 as a Financial Software Support Representative. From May 1990 untilNovember 1994, Mr. Douglas served as Manager of Electronic Billing, and from December 1994 until June1999, he held the position of Director of Programming Services. From July 1999 until May 2006, Mr. Douglasserved as our Executive Vice President and Chief Operating Officer.

David A. Dye – Chief Financial Officer, Secretary and Treasurer. David A. Dye, age 42, has served asour Chief Financial Officer, Secretary and Treasurer since July 1, 2010. Mr. Dye served as our President andChief Executive Officer from July 1999 to May 2006. He was elected as a director in March 2002 and has servedas our Chairman of the Board since May 2006. Mr. Dye began his career with CPSI in May 1990 as a FinancialSoftware Support Representative and served in various capacities until July 1999. Mr. Dye has served as adirector of Bulow Biotech Prosthetics, LLC, a company headquartered in Nashville, Tennessee that operatesprosthetic clinics in the Southeastern United States, since July 2006.

Victor S. Schneider – Senior Vice President—Corporate and Business Development. Victor S.Schneider, age 53, has served as our Senior Vice President—Corporate and Business Development sinceDecember 2005. Mr. Schneider is responsible for revenue generation efforts, customer relations, strategic growthinitiatives and positioning, and market execution. Mr. Schneider began his career with us in June 1983 as SalesManager. He served in that capacity until January 1997 when he was promoted to Sales Director. He served asour Vice President—Sales and Marketing from July 1999 until December 2005.

Robert D. Hinckle – Vice President—Software Services. Robert D. Hinckle, age 42, has served as ourVice President—Software Services since October 2004. Mr. Hinckle is responsible for overseeing all aspects ofthe installation and support of our software products. Since beginning his career with us in 1995 as a FinancialSoftware Support Representative, Mr. Hinckle has worked in various positions in our Software ServicesDivision, including Team Manager, Assistant Director and Director of that division.

Patrick A. Immel – Vice President—Information Technology Services. Patrick A. Immel, age 41, hasserved as our Vice President—Information Technology Services since January 2000. Mr. Immel is responsiblefor overseeing technical hardware and support and hardware research and development. Mr. Immel began hiscareer with us in July 1993 as a Financial Software Support Representative. Since that time, Mr. Immel hasserved as a programmer, Manager of Technical Support and most recently as Director of Information TechnologyServices.

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Troy D. Rosser – Senior Vice President—Sales. Troy D. Rosser, age 47, has served as our Senior VicePresident — Sales since January 2012, having previously served as Vice President – Sales since October 2005.Mr. Rosser is responsible for overseeing all of our sales and marketing efforts. Mr. Rosser began his career withus in March 1989 as a Financial Software Support Representative. In 1992, Mr. Rosser was transferred to theSales and Marketing division where he has worked in various positions, including Sales Manager and, fromOctober 2000 until October 2005, Director of Sales.

Michael K. Muscat, Jr. – Senior Vice President—Product Development Services. Michael K. Muscat,Jr., age 38, has served as our Senior Vice President – Product Development Services since March 2008.Mr. Muscat is responsible for overseeing all aspects of the development quality assurance/testing,documentation, and distribution of all application software. Mr. Muscat began his career with us in July 1996 asa Software Support Representative. Mr. Muscat then served as a Programmer and Manager of OutsourcingServices. From June 2002 to May 2006, Mr. Muscat served as the Director of Business Management Servicesand from May 2006 until March 2008 as the Vice President of Business Management Services.

Robert D. Smith – Vice President—Product Development Services. Robert D. Smith, age 41, has servedas our Vice President – Product Development Services since March 2008. Mr. Smith is responsible foroverseeing all aspects of system programming and enhancements within our Product Development division.Since Mr. Smith began his career with us in September 1993, he has served in the capacity of Technical SupportRepresentative, Programmer, and Programming Manager. From January 2001 to May 2006, Mr. Smith served asthe Director of Programming Services and from May 2006 to March 2008 as Vice President of ProgrammingServices.

Christopher L. Fowler – Vice President—Business Management Services. Christopher L. Fowler, age36, has served as our Vice President – Business Management Services since March 2008. Mr. Fowler isresponsible for overseeing all aspects of the business management services we provide to our clients. Mr. Fowlerbegan his career with us in May 2000 as a Software Support Representative and later as a manager of FinancialSoftware Services. From August 2004 until March 2008, Mr. Fowler served as Assistant Director and Director ofBusiness Management Services.

James B. Britain – Vice President—Finance and Controller. James B. Britain, age 45, has served as ourVice President – Finance and Controller since March 2011. Mr. Britain is our principal accounting officer.Mr. Britain began his career with us in September 2007 as Controller and served in that capacity until March2011. Prior to his appointment as Controller, Mr. Britain was Controller of Azalea Aviation, Inc., a fixed baseoperator in Mobile, Alabama, from September 2006 until September 2007.

Company Website

The Company maintains a website at http://www.cpsinet.com. The Company makes available on its website,free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K,and all amendments to those reports, as soon as it is reasonably practicable after such material is electronicallyfiled with the Securities and Exchange Commission. The Company is not including the information contained onor available through its website as a part of, or incorporating such information into, this Annual Report on Form10-K.

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ITEM 1A. RISK FACTORS

There is significant uncertainty in the healthcare industry in which we operate, both as a result of recently enactedlegislation and changing government regulation, which may have a material adverse impact on the businesses ofour hospital customers and ultimately on our business, financial condition and results of operations.

The healthcare industry is subject to changing political, economic and regulatory influences that may affectthe procurement processes and operation of healthcare facilities, including our hospital customers. During thepast several years, the healthcare industry has been subject to an increase in governmental regulation of, amongother things, reimbursement rates and certain capital expenditures.

The Patient Protection and Affordable Care Act (H.R. 3590; Public Law 111-148) (“PPACA”) and TheHealth Care and Education Reconciliation Act of 2010 (H.R. 4872) (the “Reconciliation Act”), which amends thePPACA (collectively the “Health Reform Laws”), were signed into law in March 2010. The Health Reform Lawsrepresent sweeping changes to the U.S. healthcare system. While we currently anticipate that the Health ReformLaws will have little direct impact on our internal operations, they may have a significant impact on the businessof our hospital customers, which in turn could affect our business. Some of the provisions in the Health ReformLaws may have a positive impact, by expanding the use of electronic health records in certain federal programs,for example, while others, such as reductions in reimbursement for certain types of providers, may have anegative impact on our customers due to fewer available resources. Increases in fraud and abuse penalties mayalso adversely affect participants in the health care sector, including us.

Among other things, the Health Reform Laws require nearly all individuals to have health insurance, expandMedicaid eligibility, mandate material changes to the delivery of healthcare services and reduce thereimbursement paid for such services in order to generate savings in the Medicare program, and modify certainpayment systems to encourage more cost-effective care and a reduction of inefficiencies and waste, includingthrough new tools to address fraud and abuse.

Many of the provisions of the Health Reform Laws do not take effect for an extended period of time, duringwhich time they will likely be subject to further adjustments through future legislation and the outcome ofconstitutional challenges. Additionally, we anticipate that many of the provisions in the Health Reform Laws willbe subject to further clarification and modification through the rule-making process, the development of agencyguidance and judicial interpretations. Accordingly, we have not been able to determine at this point whether theimpact of the legislation on our hospital customers will be positive, negative or neutral. However, it is likely thatthe Health Reform Laws will affect hospitals differently depending upon the populations they serve and theirpayor mix. Our target market of community hospitals typically serve higher uninsured populations than largerurban hospitals and rely more heavily on Medicare and Medicaid for reimbursement. It remains to be seenwhether the increase in the insured population for community hospitals will be sufficient to offset proposed cutsin Medicare and Medicaid reimbursements contained in the Health Reform Laws.

The Health Reform Laws will ultimately lead to significant changes in the healthcare system. While it is tooearly to fully understand and assess the impact of the Health Reform Laws on our hospital customers, it ispossible that the Health Reform Laws could have a material adverse effect on the business of our customers,which in turn could have a material adverse effect on our operations and financial condition.

Additionally, various legislators have announced that they intend to examine further proposals to reformcertain aspects of the U.S. healthcare system. Healthcare providers may react to these proposals, and theuncertainty surrounding such proposals, by curtailing or deferring investments, including those for our systemsand related services. Cost-containment measures instituted by healthcare providers as a result of regulatoryreform or otherwise could result in a reduction in the allocation of capital funds. Such a reduction could have anadverse effect on our ability to sell our systems and related services. On the other hand, changes in the regulatoryenvironment have increased and may continue to increase the needs of healthcare organizations for cost-effectivedata management and thereby enhance the overall market for healthcare management information systems. Wecannot predict what effect, if any, such additional proposals or healthcare reforms might have on our business,financial condition and results of operations.

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As existing regulations mature and become better defined, we anticipate that these regulations will continueto affect certain of our products and services, but we cannot fully predict the effect at this time. We have takensteps to modify our products, services and internal practices as necessary to facilitate our compliance with theregulations, but there can be no assurance that we will be able to do so in a timely or complete manner.Achieving compliance with these regulations could be costly and distract management’s attention and divertother company resources, and any noncompliance by us could result in civil and criminal penalties.

While provisions in the American Recovery and Reinvestment Act of 2009 have increased and are expected toincrease the demand for healthcare information technology, including the solutions offered by us, such lawsand regulations may require additional expenditures and have adverse consequences on our business.

The American Recovery and Reinvestment Act of 2009 (the “ARRA”), includes more than $19 billion infunding to aid healthcare organizations in modernizing their operations through the acquisition and wide-spreaduse of healthcare information technology. Included in the funding is approximately $17.2 billion in incentivesthrough Medicare and Medicaid reimbursement systems to encourage and assist healthcare providers in adoptingand using electronic health records (“EHRs”). These incentive payments began in February 2011 and last through2015. If an eligible healthcare provider does not begin to demonstrate meaningful use of EHRs by 2015, thenreimbursement under Medicare will begin to be reduced.

Notwithstanding that the ARRA places substantial emphasis on the modernization of the U.S. healthcaresystem by incentivizing the use of healthcare information technology, with a primary focus on EHRs, our abilityto benefit from such initiatives could change. Final regulations issued in July 2010 under the Health InformationTechnology for Economic and Clinical Health Act, or HITECH Act, which was enacted as part of the ARRA in2009, established the technical capabilities required for certified EHRs, as well as “meaningful use” requirementsthat healthcare providers must satisfy to qualify for bonus payments under the Medicare program. We havedevoted significant resources to help ensure that our technology meets the ARRA’s EHR certificationrequirements, and our EHR system was certified under ARRA in late 2010. However, in the event that changes tothe EHR technical requirements are made, we may be required to incur additional research and developmentexpenditures to modify or expand our software systems in order to maintain certification under the ARRA. Thefailure of our EHR system to maintain its certification under ARRA, as result of changes to the technicalrequirements under the ARRA or otherwise, could adversely affect our competitive position and have a materialadverse effect on our business.

Economic, market and other factors may cause a decline in spending for information technology and servicesby our current and prospective customers which may result in less demand for our products, lower prices and,consequently, lower revenues and a lower revenue growth rate.

The purchase of our information system involves a significant financial commitment by our customers. Atthe same time, the healthcare industry faces significant financial pressures that could adversely affect overallspending on healthcare information technology and services. For example, the recent economic recession andcontinued decrease in availability of credit, combined with potential reductions in federal and state funding forMedicare and Medicaid, has caused hospitals to reduce, eliminate or postpone information technology relatedand other spending. To the extent spending for healthcare information technology and services declines orincreases slower than we anticipate, demand for our products and services, as well as the prices we charge, couldbe adversely affected. Accordingly, we cannot assure you that we will be able to increase or maintain ourrevenues or our growth rate.

There are a limited number of hospitals in our target market. Consolidation in the healthcare industry couldresult in the loss of existing customers, a reduction in our potential customer base and downward pressure onour products’ prices.

There are a finite number of hospitals with 300 or fewer acute care beds in our general target market.Saturation of this market with our products or our competitors’ products could eventually limit our revenues andgrowth. Furthermore, many healthcare providers have consolidated to create larger healthcare delivery

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enterprises with greater market power. If this consolidation continues, we could lose existing customers andcould experience a decrease in the number of potential purchasers of our products and services. The loss ofexisting and potential customers due to industry consolidation could cause our revenue growth rate to decline. Inaddition, larger, consolidated enterprises could have greater bargaining power, which may lead to downwardpressure on the prices for our products and services.

Continued volatility in and disruption to the global capital and credit markets may adversely affect our abilityto access credit in the future, the cost of any credit obtained in the future, and the financial soundness of ourcustomers and our business.

While the Company does not currently have any debt, ongoing volatility and disruption in the global capitaland credit markets, including the bankruptcy or restructuring of certain financial institutions, reduced lendingactivity by other financial institutions and decreased liquidity, may adversely affect the availability, terms andcost of credit should we seek it in the future. Although we believe that our operating cash flow and financialassets will give us the ability to meet our financing needs for the foreseeable future, there can be no assurancethat the continued or increased volatility and disruption in the global capital and credit markets will not impairour liquidity or increase the costs of any future borrowing.

Our business could also be negatively impacted to the extent that our hospital customers experiencedisruptions resulting from tighter capital and credit markets, the recent economic recession or cuts in Medicareand Medicaid funding. As a result, hospitals may modify, delay or cancel plans to purchase our software systemsor services. Additionally, if hospitals’ operating and financial performance deteriorates, or if they are unable tomake scheduled payments or obtain credit, they may not be able to pay, or may delay payment of, accountsreceivable owed to us. Any inability of customers to pay us for our products and services may adversely affectour earnings and cash flow.

The absence of third-party credit has resulted in many of our hospital customers seeking financingarrangements from us to purchase our software systems and services. These financing arrangements impact ourshort-term operating cash flow and cash available. Should the requests for these financing arrangements continueor increase, our business could be negatively impacted by our inability to finance these arrangements. Inaddition, the absence of credit could negatively impact our existing financing receivables should our customerswith financing arrangements be unable to meet their obligations.

Competition with companies that have greater financial, technical and marketing resources than we havecould result in loss of customers and/or a lowering of prices for our products, causing a decrease in ourrevenues and/or market share.

Our principal competitors are Meditech, Healthland and HMS, Meditech, Healthland and HMS competewith us directly in our target market of small and midsize hospitals. These companies offer products and servicesthat are comparable to our system and are designed to address the needs of community hospitals.

Our secondary competitors include McKesson Corporation, Quality Systems, Inc., Quadramed Corp.,Prognosis Health Information Systems LLC, Cerner Corporation, and Siemens Corporation. Most of thesecompanies are significantly larger than we are, and they typically sell their products and services to largerhospitals outside of our target market. However, they sometimes compete directly with us. We also facecompetition from providers of practice management systems, general decision support and database systems andother segment-specific applications, as well as from healthcare technology consultants. Any of these companies,as well as other technology or healthcare companies, could decide at any time to specifically target hospitalswithin our target market.

A number of existing and potential competitors are more established than we are and have greater namerecognition and financial, technical and marketing resources. Products of our competitors may have betterperformance, lower prices and broader market acceptance than our products. We expect increased competitionthat could cause us to lose customers, lower our prices to remain competitive and, consequently, experience

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lower revenues, revenue growth and profit margins. Additionally, the substantial amount of money contemplatedby the ARRA to be spent on healthcare information technology may further increase competition by attractingnew and financially stronger companies to this industry.

Our failure to develop new products or enhance current products in response to market demands couldadversely impact our competitive position and require substantial capital resources to correct.

The needs of hospitals in our target market are subject to rapid change due to government regulation, trendsin clinical care practices and technological advancements. As a result of these changes, our products may quicklybecome obsolete or less competitive. New product introductions and enhancements by our competitors that moreeffectively or timely respond to changing industry needs may weaken our competitive position.

We continually redesign and enhance our products to incorporate new technologies and adapt our productsto ever-changing hardware and software platforms. Often we face difficult choices regarding which newtechnologies to adopt. If we fail to anticipate or respond adequately to technological advancements, or experiencesignificant delays in product development or introduction, our competitive position could be negatively affected.Moreover, our failure to offer products acceptable to our target market could require us to make significantcapital investments and incur higher operating costs to redesign our products, which could negatively affect ourfinancial condition and operating results.

Potential regulation of our products as medical devices by the U.S. Food and Drug Administration couldincrease our costs, delay the introduction of new products and slow our revenue growth.

The U.S. Food and Drug Administration, or the “FDA,” could become more active in regulating the use ofcomputer software for clinical purposes. The FDA has increasingly regulated computer products and computer-assisted products as medical devices under the federal Food, Drug and Cosmetic Act, an example of which is ourImageLink® product. If the FDA regulates any more of our products as medical devices, we would likely berequired to, among other things:

• seek FDA clearance by demonstrating that our product is substantially equivalent to a device alreadylegally marketed, or obtain FDA approval by establishing the safety and effectiveness of our product;

• comply with rigorous regulations governing pre-clinical and clinical testing, manufacture, distribution,labeling and promotion of medical devices; and

• comply with the Food, Drug and Cosmetic Act’s general controls, including establishment registration,device listing, compliance with good manufacturing practices and reporting of specified devicemalfunctions and other adverse device events.

There is a possibility that some of our products currently in development or to be developed in the futurecould be subjected to FDA regulation similar to our ImageLink® product. If any of our products fail to complywith FDA requirements, we could face FDA refusal to grant pre-market clearance or approval of products;withdrawal of existing clearances and approvals; fines, injunctions or civil penalties; recalls or productcorrections; production suspensions; and criminal prosecution. FDA regulation of our products could increaseour operating costs, delay or prevent the marketing of new or existing products and adversely affect our revenuegrowth.

Governmental regulations relating to patient confidentiality and other matters could increase our costs.

State and federal laws regulate the confidentiality of patient records and the circumstances under whichthose records may be released. These regulations may require the users of such information to implementsecurity measures. Regulations governing electronic health data transmissions are also evolving rapidly, and theyare often unclear and difficult to apply.

In our support agreements with our customers, we agree to update our software applications to comply withapplicable federal and state laws. While we believe we have developed products that comply with the HealthInsurance Portability and Accountability Act of 1996 (“HIPAA”) and other regulatory requirements, new laws,

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regulations and interpretations could force us to further redesign our products. Any such product redesign couldconsume significant capital and research and development and other resources, which could significantlyincrease our operating costs.

Additionally, the Health Information Technology for Economic and Clinical Health Act (“HITECH Act”),which was enacted as part of the ARRA in 2009, significantly expanded HIPAA by extending the securitystandards of HIPAA to “business associates” of healthcare providers that are covered entities under HIPAA.Under the HITECH Act, business associates are required to establish administrative, physical and technicalsafeguards and are subject to direct penalties for violations. Our business management services activitiesfrequently entail us acting in the capacity of a business associate to the hospitals that we serve, and therefore weare covered by the patient privacy and security standards of HIPAA and subject to oversight of the Department ofHealth and Human Services (“DHHS”). We believe that we have taken all necessary steps to comply withHIPAA, as it applies to us as a business associate, but it is important to note that DHHS could, at any time in thefuture, adopt new rules or modify existing rules in a manner that could require us to change our systems oroperations. There is no certainty that we will be able to respond to all such rules in a timely manner and ourinability to do so could adversely affect our business.

Our products assist clinical decision-making and related care by capturing, maintaining and reportingrelevant patient data. If our products fail to provide accurate and timely information, our customers couldassert claims against us that could result in substantial cost to us, harm our reputation in the industry andcause demand for our products to decline.

We provide products that assist clinical decision-making and related care by capturing, maintaining andreporting relevant patient data. Our products could fail or produce inaccurate results due to a variety of reasons,including mechanical error, product flaws, faulty installation and/or human error during the initial dataconversion. If our products fail to provide accurate and timely information, customers and/or patients could sueus to hold us responsible for losses they incur from these errors. These lawsuits, regardless of merit or outcome,could result in substantial cost to us, divert management’s attention from operations and decrease marketacceptance of our products. We attempt to limit by contract our liability for damages arising from negligence,errors or mistakes. Despite this precaution, such contract provisions may not be enforceable or may not otherwiseprotect us from liability for damages. We maintain general liability insurance coverage, including coverage forerrors or omissions. However, this coverage may not be sufficient to cover one or more large claims against us orotherwise continue to be available on terms acceptable to us. In addition, the insurer could disclaim coverage asto any future claim.

Breaches of security and viruses in our systems could result in customer claims against us and harm to ourreputation causing us to incur expenses and/or lose customers.

In the course of our business operations, we compile and transmit confidential information, including patienthealth information. We have included security features in our systems that are intended to protect the privacy andintegrity of this information. Despite the existence of these security features, our system may experience breakinsand similar disruptive problems that could jeopardize the security of information stored in and transmittedthrough the computer networks of our customers. In addition, the other systems with which we may interface,such as the Internet and related systems, may be vulnerable to security breaches, viruses, programming errors orsimilar disruptive problems. Because of the sensitivity of medical information, customers could sue us forbreaches of security involving our system. Also, actual or perceived security breaches in our system could harmthe market perception of our products which could cause us to lose existing and prospective customers.Additionally, the effect of security breaches and related issues could disrupt our ability to perform certain keybusiness functions and could potentially reduce demand for our products and services. Accordingly, we haveexpended significant resources toward establishing and enhancing the security of our related infrastructures,although no assurance can be given that these systems will be entirely free from potential breach. Maintainingand enhancing our infrastructure security may require us to expend significant capital in the future.

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New products that we introduce or enhancements to our existing products may contain undetected errors orproblems that could affect customer satisfaction and cause a decrease in revenues.

Highly complex software products such as ours sometimes contain undetected errors or failures when firstintroduced or when updates and new versions are released. Tests of our products may not detect bugs or errorsbecause it is difficult to simulate our customers’ wide variety of computing environments. Despite extensivetesting, from time to time we have discovered defects or errors in our products. Defects or errors discovered inour products could cause delays in product introductions and shipments, result in increased costs and diversion ofdevelopment resources, require design modifications, decrease market acceptance or customer satisfaction withour products, cause a loss of revenue, result in legal actions by our customers and cause increased insurancecosts.

Our facilities are located in an area vulnerable to hurricanes and tropical storms, and the occurrence of asevere hurricane, similar storm or other natural disaster could cause damage to our facilities and equipment,which could require us to cease or limit our operations.

Most of our facilities and employees are situated on one campus in Mobile, Alabama, which is located 30miles north of the coast of the Gulf of Mexico. Our facilities are vulnerable to significant damage or destructionfrom hurricanes and tropical storms. We are also vulnerable to damage from other types of disasters, includingtornadoes, fires, floods and similar events. If any disaster were to occur, our ability to conduct business at ourfacilities could be seriously impaired or completely destroyed. This would have adverse consequences for ourcustomers who depend on us for system support or business management services. Also, the servers of customerswho use our remote access services could be damaged or destroyed in any such disaster. This would havepotentially devastating consequences to those customers. Although we have an emergency recovery plan,including back-up systems in remote locations, there can be no assurance that this plan will effectively preventthe interruption of our business due to a natural disaster. Furthermore, the insurance we maintain may not beadequate to cover our losses resulting from any natural disaster or other business interruption.

Interruptions in our power supply and/or telecommunications capabilities could disrupt our operations, causeus to lose revenues and/or increase our expenses.

We currently have backup generators to be used as alternative sources of power in the event of a loss ofpower to our facilities. If these generators were to fail during any power outage, we would be temporarily unableto continue operations at our facilities. This would have adverse consequences for our customers who depend onus for system support, business management and information technology management and professional services.Any such interruption in operations at our facilities could damage our reputation, harm our ability to retainexisting customers and obtain new customers, and could result in lost revenue and increased insurance and otheroperating costs.

We also have customers for whom we store and maintain computer servers containing critical patient andadministrative data. Those customers access this data remotely through telecommunications lines. If our powergenerators fail during any power outage or if our telecommunications lines are severed or impaired for anyreason, those customers would be unable to access their mission critical data causing an interruption in theiroperations. In such event our remote access customers and/or their patients could seek to hold us responsible forany losses. We would also potentially lose those customers, and our reputation could be harmed.

If we are unable to attract and retain qualified customer service and support personnel, our business andoperating results will suffer.

Our customer service and support is a key component of our business. Most of our hospital customers havesmall information technology staffs, and they depend on us to service and support their systems. Future difficultyin attracting, training and retaining capable customer service and support personnel could cause a decrease in the

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overall quality of our customer service and support. That decrease would have a negative effect on customersatisfaction which could cause us to lose existing customers and could have an adverse effect on our newcustomer sales. The loss of customers due to inadequate customer service and support would negatively impactour ability to continue to grow our business.

We do not have employment or non-competition agreements with our key personnel, and their departure couldharm our future success.

Our future success depends to a significant extent on the leadership and performance of our chief executiveofficer and other executive officers. We do not have employment or non-competition agreements with any of ourexecutive officers. Therefore, they may terminate their employment with us at any time and may compete againstus. The loss of the services of any of our executive officers could have a material adverse effect on our business,financial condition and results of operations.

Because we believe that proprietary rights are material to our success, misappropriation of these rights couldlimit our ability to compete effectively and adversely affect our financial condition.

We are heavily dependent on the maintenance and protection of our intellectual property and we rely largelyon a combination of confidentiality provisions in our customer agreements, employee nondisclosure agreements,trademark and trade secret laws and other measures to protect our intellectual property. Additionally, oursoftware is not patented or copyrighted. Although we attempt to control access to our intellectual property,unauthorized persons may attempt to copy or otherwise use our intellectual property. There can be no assurancethat the legal protections and precautions we take will be adequate to prevent misappropriation of our technologyor that competitors will not independently develop technologies equivalent or superior to ours. Monitoringunauthorized use of our intellectual property is difficult, and the steps we have taken may not preventunauthorized use. If our competitors gain access to our intellectual property, our competitive position in theindustry could be damaged. An inability to compete effectively could cause us to lose existing and potentialcustomers and experience lower revenues, revenue growth and profit margins.

If we are deemed to infringe on the intellectual property rights of third parties, we could incur unanticipatedexpense and be prevented from providing our products and services if we cannot obtain licenses to these rightson commercially acceptable terms.

We do not believe that our operations or products infringe on the intellectual property rights of others.However, there can be no assurance that others will not assert infringement or trade secret claims against us withrespect to our current or future products. Many participants in the technology industry have an increasing numberof patents and patent applications and have frequently demonstrated a readiness to take legal action based onallegations of patent and other intellectual property infringement. Further, as the number and functionality of ourproducts increase, we believe we may become increasingly subject to the risk of infringement claims. Ifinfringement claims are brought against us, these assertions could distract management. We may have to spend asignificant amount of money and time to defend or settle those claims. In addition, claims against third partiesfrom which we purchase software could adversely affect our ability to access third party software for oursystems.

If we were found to infringe on the intellectual property rights of others, we could be forced to paysignificant license fees or damages for infringement. If we were unable to obtain licenses to these rights oncommercially acceptable terms, we would be required to discontinue the sale of our products that contain theinfringing technology. Our customers would also be required to discontinue the use of those products. We areunable to insure against this risk on an economically feasible basis. Even if we were to prevail in an infringementlawsuit, the accompanying publicity could adversely impact the demand for our system. Under somecircumstances, we agree to indemnify our customers for some types of infringement claims that may arise fromthe use of our products.

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We are subject to the development and maintenance of the Internet infrastructure, which is not within ourcontrol, and which may diminish Internet usage and availability as well as access to our web site.

We deliver Internet-based services and, accordingly, we are dependent on the maintenance of the Internet bythird parties. The Internet infrastructure may be unable to support the demands placed on it and our performancemay decrease if the Internet continues to experience its historic trend of expanding usage. As a result of damageto portions of its infrastructure, the Internet has experienced a variety of performance problems which maycontinue into the foreseeable future. Such Internet related problems may diminish Internet usage and availabilityof the internet to us form transmittal of our Internet-based services. In addition, difficulties, outages, and delaysby Internet service providers, online service providers and other web site operators may obstruct or diminishaccess to our Web site by our clients resulting in a loss of potential or existing users of our services.

We may be subject to liability in the event we provide inaccurate claims data to payors.

We offer electronic claims submission services as part of our business management services. While we haveimplemented certain product features designed to maximize the accuracy and completeness of claimssubmissions, these features may not be sufficient to prevent inaccurate claims data from being submitted topayors, Should inaccurate claims data be submitted to payors, we may be subject to liability claims.

We are dependent on our license rights and other services from third parties, which may cause us todiscontinue, delay or reduce product shipments.

We depend upon licenses for some of the technology used in our products as well as other services fromthird-party vendors. Most of these arrangements can be continued/renewed only by mutual consent and may beterminated for any number of reasons. We may not be able to continue using the products or services madeavailable to us under these arrangements on commercially reasonable terms or at all. As a result, we may have todiscontinue, delay or reduce product shipments or services provided until we can obtain equivalent technology orservices. Most of our third-party licenses are non-exclusive. Our competitors may obtain the right to use any ofthe business elements covered by these arrangements and use these elements to compete directly with us. Inaddition, if our vendors choose to discontinue providing their technology or services in the future or areunsuccessful in their continued research and development efforts, we may not be able to modify or adapt our ownproducts.

We may be subject to false or fraudulent claim laws.

There are numerous federal and state laws that forbid submission of false information or the failure todisclose information in connection with submission and payment of physician claims for reimbursement. In somecases, these laws also forbid abuse of existing systems for such submission and payment. Any failure of ourbilling and collection services to comply with these laws and regulations could result in substantial liabilityincluding, but not limited to, criminal liability, could adversely affect demand for our services and could force usto expend significant capital, research and development and other resources to address the failure. Errors by us orour systems with respect to entry, formatting, preparation or transmission of claim information may bedetermined or alleged to be in violation of these laws and regulations. Determination by a court or regulatoryagency that our services violate these laws could subject us to civil or criminal penalties, invalidate all orportions of some of our client contracts, require us to change or terminate some portions of our business, requireus to refund portions of our services fees, cause us to be disqualified from serving clients doing business withgovernment payors and have an adverse effect on our business.

In most cases where we are permitted to do so, we calculate charges for our billing and collection servicesbased on a percentage of the collections that our clients receive as a result of our services. To the extent thatviolations or liability for violations of these laws and regulations require intent, it may be alleged that thispercentage calculation provides us or our employees with incentive to commit or overlook fraud or abuse in

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connection with submission and payment of reimbursement claims. The U.S. Centers for Medicare and MedicaidServices has stated that it is concerned that percentage-based billing services may encourage billing companies tocommit or to overlook fraudulent or abusive practices.

A portion of our business involves billing of Medicare claims on behalf of its clients. In an effort to combatfraudulent Medicare claims, the federal government offers rewards for reporting of Medicare fraud which couldencourage others to subject us to a charge of fraudulent claims, including charges that are ultimately proven to bewithout merit.

We are subject to changes in and interpretations of financial accounting matters that govern the measurementof our performance, one or more of which could adversely affect our business, financial condition, cash flows,revenue and results of operations.

Based on our reading and interpretations of relevant guidance, principles or concepts issued by, among otherauthorities, the American Institute of Certified Public Accountants, the Financial Accounting Standards Boardand the Securities and Exchange Commission, we believe our current sales and licensing contract terms andbusiness arrangements have been properly reported. However, there continue to be issued interpretations andguidance for applying the relevant standards to a wide range of sales and licensing contract terms and businessarrangements that are prevalent in the software industry. Future interpretations or changes by the regulators ofexisting accounting standards or changes in our business practices could result in changes in our revenuerecognition and/or other accounting policies and practices that could adversely affect our business, financialcondition, cash flows, revenue and results of operations.

The unpredictability of our quarterly operating results may cause us to fail to meet revenues or earningsexpectations which could cause the price of our common stock to fluctuate or decline.

There is no assurance that consistent quarterly growth in our business will occur. Our quarterly revenuesmay fluctuate and may be difficult to forecast for a variety of reasons. For example, prospective customers oftentake significant time evaluating our system and related services before making a purchase decision. Moreover, aprospective customer who has placed an order for our system could decide to cancel that order or postponeinstallation of the ordered system. If a prospective customer delays or cancels a scheduled system installationduring any quarter, we may not be able to schedule a substitute system installation during that quarter. Theamount of revenues that would have been generated from that installation will be postponed or lost. Thepossibility of delays or cancellations of scheduled system installations could cause our quarterly revenues tofluctuate.

The following factors may also affect demand for our products and services and cause our quarterlyrevenues to fluctuate:

• changes in customer budgets and purchasing priorities;

• the ability of our customers to obtain financing for the purchase of our products;

• the financial stability of our customers;

• the specific mix of software, hardware and services in orders from customers;

• the timing of new product announcements and product introductions by us and our competitors;

• market acceptance of new products, product enhancements and services from us and our competitors;

• product and price competition;

• our success in expanding our sales and marketing programs;

• the availability and cost of system components;

• delay of revenue recognition to future quarters due to an increase in the sale of our remote access SaaSservices;

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• the length of sales cycles and installation processes;

• changes in revenue recognition or other accounting guidelines employed by us and/or established bythe Financial Accounting Standards Board or other rulemaking bodies;

• accounting policies concerning the timing of recognition of revenue;

• personnel changes; and

• general market and economic factors.

Variations in our quarterly revenues may adversely affect our operating results. In each fiscal quarter, ourexpense levels, operating costs and hiring plans are based on projections of future revenues and are relativelyfixed. Because a significant percentage of our expenses are relatively fixed, a variation in the timing of systemssales, implementations and installations can cause significant variations in operating results from quarter toquarter. As a result, we believe that interim period-to-period comparisons of our results of operations are notnecessarily meaningful and should not be relied upon as indications of future performance. Further, our historicaloperating results are not necessarily indicative of future performance for any particular period.

We currently recognize revenue pursuant to Financial Accounting Standards Board (“FASB”) AccountingStandards Codification (“ASC”) Topic 985-605, Software, Revenue Recognition, or ASC 985-605. ASC 985-605summarizes the FASB’s views in applying generally accepted accounting principles to revenue recognition infinancial statements. There can be no assurance that application and subsequent interpretations of thispronouncement will not further modify our revenue recognition policies, or that such modifications would notadversely affect our operating results reported in any particular quarter or year.

Due to all of the foregoing factors, it is possible that our operating results may be below the expectations ofsecurities analysts and investors. In such event, the price of our common stock would likely be adverselyaffected.

Our common stock price has been volatile, which could result in substantial losses for investors purchasingshares of our common stock and in litigation against us.

Volatility may be caused by a number of factors including but not limited to:

• actual or anticipated quarterly variations in operating results;

• rumors about our performance, software solutions, or merger and acquisition activity;

• changes in expectations of future financial performance or changes in estimates of securities analysts;

• governmental regulatory action;

• healthcare reform measures;

• customer relationship developments;

• purchases or sales of company stock;

• changes occurring in the markets in general;

• macroeconomic conditions, both nationally and internationally; and

• other factors, many of which are beyond our control.

Furthermore, the stock market in general, and the market for software, healthcare and high technologycompanies in particular, has experienced significant volatility that often has been unrelated to the operatingperformance of particular companies. These broad market and industry fluctuations may adversely affect thetrading price of our common stock, regardless of actual operating performance.

Moreover, in the past, securities class action litigation has often been brought against a company followingperiods of volatility in the market price of its securities. We may in the future be the target of similar litigation.Securities litigation could result in substantial costs and divert management’s attention and resources.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our corporate campus is located on approximately 16.5 acres in Mobile, Alabama that consists ofapproximately 135,500 square feet of office space. Our main campus headquarter building consists ofapproximately 66,000 square feet of office and warehouse space. We also have eleven additional smaller campusbuildings consisting of approximately 6,000 square feet of office space each. Each of these smaller buildings isdesigned to accommodate a team of employees assigned to install and support a particular software application.We also occupy an additional campus building consisting of approximately 3,500 square feet of office spacewhich houses our sales personnel. The company also owns 11.3 acres of undeveloped real property adjacent toour corporate campus.

Prior to December 13, 2011, we leased the 16.5 acres and all of our corporate campus buildings in Mobile,Alabama from a related party, C.P. Investments, Inc., an Alabama corporation. The stockholders of C.P.Investment include, among other persons, Michael K. Muscat, Jr., one of our executive officers, and his siblings,Ellen M. Harvey and Susan M. Slaton. Our leases with C.P. Investments, Inc. were terminated on December 13,2011 in conjunction with our purchase of the property from C.P. Investments for $9.5 million. The 11.3 acres ofundeveloped property is also directly owned by CPSI.

On January 1, 2007, we entered into a lease with Riverside Corporation to house a call center to support thegrowth of our Business Management Services. This building consists of approximately 10,000 square feet and islocated in Lanett, Alabama.

On January 20, 2009, we entered into a lease agreement with Strauss Properties, LLC to house a call centerto further support the growth of our Business Management Services. This lease consists of approximately 10,800square feet of space and is located in Monroe, Louisiana.

On May 13, 2009, we entered into a lease agreement with USA Research and Technology Corporation fortemporary office space to conduct training for newly hired support staff. It is anticipated that the lease for thisspace will be vacated sometime in 2012.

On September 14, 2009, we entered into a lease agreement with 3725 Airport Boulevard, LP to house themajority of our Business Management Services employees. This lease consists of approximately 32,240 squarefeet and is located in Mobile, Alabama, approximately 5 miles from our corporate campus location.

On February 1, 2010, we entered into a lease agreement with 3725 Airport Boulevard, LP to lease additionalspace for our Business Management Services employees. This lease consists of approximately 11,240 square feetand is located in Mobile, Alabama, approximately 5 miles from our corporate campus location.

We anticipate that we will lease additional office space in 2012 in Alabama to house additional personnel,and that this additional office space, combined with our existing facilities, will be sufficient to meet our needsuntil the end of 2012 and beyond.

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ITEM 3. LEGAL PROCEEDINGS

From time to time, we are involved in routine litigation that arises in the ordinary course of business. We arenot currently involved in any litigation that we believe could reasonably be expected to have a material adverseeffect on our business, financial condition or results of operations.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERMATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for CPSI Common Stock

At March 9, 2012, CPSI had 78 stockholders of record (which does not include the number of beneficialowners whose shares are held in “street” names by broker-dealers and other nominees who are the recordholders) and 11,063,220 shares of common stock outstanding.

CPSI common stock is listed on the NASDAQ Global Select Market under the symbol “CPSI.” Thefollowing table sets forth, for the calendar quarters indicated, the high and low sales prices per share for CPSI’scommon stock on the NASDAQ Global Select Market, and the cash dividends declared per share in each suchquarter:

High Low

DividendsDeclaredPer Share

2011First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $64.39 $43.32 $0.36Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66.00 51.68 0.36Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79.06 56.78 0.36Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74.62 41.80 0.462010First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $49.37 $33.92 $0.36Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47.26 36.15 0.36Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46.35 38.60 0.36Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49.49 41.28 0.36

The last reported sales price of CPSI’s common stock as reported on the NASDAQ Global Select Market onMarch 9, 2012 was $62.15.

Dividends

During 2011 and 2010 we paid a quarterly dividend in the amount of $0.36 per share. On January 23, 2012we announced a dividend for the first quarter of 2012 in the amount of $0.46 per share. We believe that payingdividends is an effective way of providing an investment return to our stockholders and a beneficial use of ourcash. However, the declaration of dividends by CPSI is subject to the discretion of our Board of Directors. OurBoard of Directors will take into account such matters as general business conditions, our financial results andsuch other factors as our Board of Directors may deem relevant.

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ITEM 6. SELECTED FINANCIAL DATA

Year Ended December 31,

2011 2010 2009 2008 2007

(in thousands except for share and per share data)

INCOME DATA:Total sales revenue . . . . . . . . . . . . . . . $ 173,476 $ 153,247 $ 127,742 $ 119,664 $ 110,013Total costs of sales . . . . . . . . . . . . . . . 94,065 88,863 74,483 66,443 63,257

Gross profit . . . . . . . . . . . . . . . . . . . . . 79,411 64,384 53,259 53,221 46,756Total operating expenses . . . . . . . . . . . 38,116 35,287 29,890 29,510 27,708

Operating income . . . . . . . . . . . . . . . . 41,295 29,097 23,369 23,711 19,048Total other income . . . . . . . . . . . . . . . 667 674 728 940 1,203

Income before taxes . . . . . . . . . . . . . . 41,962 29,771 24,097 24,651 20,251Income taxes . . . . . . . . . . . . . . . . . . . . 16,129 11,033 8,914 9,213 7,335

Net Income . . . . . . . . . . . . . . . . . . . . . $ 25,833 $ 18,738 $ 15,183 $ 15,438 $ 12,916

Net income per share—basic . . . . . . . . $ 2.34 $ 1.71 $ 1.39 $ 1.42 $ 1.20

Net income per share—diluted . . . . . . $ 2.34 $ 1.71 $ 1.39 $ 1.42 $ 1.19

Weighted average shares outstanding:Basic . . . . . . . . . . . . . . . . . . . . . . . . . . 11,033,804 10,962,874 10,953,747 10,849,060 10,795,013Diluted . . . . . . . . . . . . . . . . . . . . . . . . . 11,033,804 10,962,874 10,955,167 10,867,669 10,837,817

As of December 31,

2011 2010 2009 2008 2007

BALANCE SHEET DATACash and cash equivalents . . . . . . . . . . $ 6,664 $ 2,940 $ 4,387 $ 11,744 $ 11,806Working capital . . . . . . . . . . . . . . . . . . 37,498 35,135 34,426 33,223 31,118Total assets . . . . . . . . . . . . . . . . . . . . . 75,645 62,735 54,450 52,867 50,408Total current liabilities . . . . . . . . . . . . 16,671 14,485 11,247 11,852 11,459Total stockholders’ equity . . . . . . . . . . 57,384 46,464 42,691 40,559 38,378

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunctionwith “Selected Financial Data” and our financial statements and the related notes included elsewhere in thisAnnual Report. This discussion and analysis contains forward-looking statements that involve risks, uncertaintiesand assumptions. Our actual results may differ materially from those anticipated in these forward-lookingstatements as a result of many factors, including but not limited to those set forth under “Risk Factors” andelsewhere in this Annual Report.

Background

CPSI was founded in 1979 and specializes in delivering comprehensive healthcare information systems andrelated services to community hospitals. Our systems and services are designed to support the primary functionalareas of a hospital and to enhance access to necessary financial and clinical information. Our comprehensivesystem enables healthcare providers to improve clinical, financial and administrative processes and outcomes.Our products and services provide solutions in key areas, including patient management, financial management,patient care and clinical, enterprise and office automation. In addition to servicing small to medium-sizedhospitals, we provide information technology services to other related entities in the healthcare industry, such asnursing homes, home health agencies and physician clinics.

We sell a fully integrated, enterprise-wide financial and clinical hospital information system comprised ofall necessary software, hardware, peripherals, forms and office supplies, together with comprehensive customerservice and support. We also offer business management services, including electronic billing submissions,patient statement processing and accounts receivable management, as part of our overall information systemsolution. We believe that as our customer base grows, the demand for our business management services willalso continue to grow, supporting further increases in recurring revenues.

Our system currently is installed and operating in over 650 hospitals in 45 states and the District ofColumbia. Our customers consist of community hospitals with 300 or fewer acute care beds, with hospitalshaving 100 or fewer acute care beds comprising approximately 94% of our customers.

Management Overview

We primarily seek revenue growth through sales of healthcare information technology systems and relatedservices to existing and new customers within our historic target market. Our strategy has produced consistentrevenue growth over the long-term, as reflected in five-and ten-year compounded annual growth rates inrevenues of approximately 8.4% and 11.3%, respectively. Selling new and additional products and services to ourexisting customer base is an important part of CPSI’s future revenue growth. We believe that as our customerbase grows, the demand for additional products and services, including business management services, will alsocontinue to grow, supporting further increases in recurring revenues. We also expect to drive revenue growthfrom new product development that we may generate from our research and development activities.

In addition to revenue growth, our business model is focused on earnings growth. Once a hospital hasinstalled our system, we continue to provide support and maintenance services to our customers on an ongoingbasis. These services are typically provided by the same personnel who perform our system installations but at areduced cost to us, and therefore at an increased gross margin. We also look to increase margins through costcontainment measures where appropriate.

As a result of the recent economic recession and the uncertainty surrounding the credit markets andtightened lending standards, hospitals have experienced reduced availability of third party credit and an overallreduction in their investment portfolios. In addition, healthcare organizations with a large dependency onMedicare and Medicaid populations, such as community based hospitals, have been impacted by the challengingfinancial condition of the federal government and many state governments and government programs.Accordingly, we recognize that prospective hospital customers often do not have the necessary capital to make

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investments in information technology. Additionally, in response to these challenges, hospitals have becomemore selective regarding where they invest capital, resulting in a focus on strategic spending that generates areturn on their investment. Despite the current economic environment, we believe healthcare informationtechnology is often viewed as more strategic to hospitals than other possible purchases because the technologyoffers the possibility of a quick return on investment. Information technology also plays an important role inhealthcare by improving safety and efficiency and reducing cost. Additionally, we believe most hospitalsrecognize that they must invest in healthcare information technology to meet current and future regulatory,compliance and government reimbursement requirements.

We have experienced an increase in customers seeking financing arrangements from us over the past fouryears for system installations as a result of ongoing economic conditions and the uncertainty surrounding thecredit markets and tightened lending standards. Historically, we have made financing arrangements available tocustomers on a case-by-case basis depending upon various aspects of the proposed contract and customerattributes. These financing arrangements include short-term payment plans, longer-term lease financing throughus or third-party financing companies, and Software as a Service (SaaS) arrangements. We intend to continue towork with prospective customers to provide for financing arrangements to purchase our systems so long as sucharrangements do not adversely affect our financial position and liquidity. We believe that meeting the financialneeds of community-based hospitals while allowing for the profitable expansion of our footprint in this marketwill remain both an opportunity and a challenge for us in the foreseeable future.

Despite the current challenging economic conditions generally, including the uncertainty surrounding creditmarkets and tightened lending standards, we have not experienced a decline in demand for our products andservices and our collections of receivables remains consistent with historical trends.

American Recovery and Reinvestment Act of 2009

While the ongoing challenging economic conditions and uncertainty surrounding credit markets andtightend lending standards have impacted and could continue to impact the community hospitals that compriseour target market, we believe that the American Recovery and Reinvestment Act of 2009 (the “ARRA”), hasincreased and will continue to increase demand for healthcare information technology and will have a positiveimpact on our business prospects through the next few years. The ARRA includes more than $19 billion infunding to aid healthcare organizations in modernizing their operations through the acquisition and wide-spreaduse of healthcare information technology. Included in the funding is approximately $17.2 billion in incentivesthrough Medicare and Medicaid reimbursement systems to encourage and assist healthcare providers in adoptingand using electronic health records (“EHRs”). These incentive payments began in February 2011 and areexpected to last through 2015. If an eligible healthcare provider does not begin to demonstrate meaningful use ofEHRs by 2015, then reimbursement under Medicare will begin to be reduced. Our hospital customers beganreceiving these incentive payments under the ARRA in February 2011. Through January 2012, approximately109 of our hospital customers had received payments for EHR adoption totaling more than $100 million.

We have been focused on ensuring that we take the necessary steps to meet the needs of communityhospitals to help them gain access to the incentives made available under the ARRA. Primary among those stepswas ensuring that our technology meets the ARRA’s EHR certification requirements. During 2010, both ourhospital and medical practice EHR solutions were certified as a complete EHR by CCHIT®. Receiving thiscertification for both our hospital and ambulatory EHR products ensures that both hospitals and providers usingour EHR systems can attain “meaningful use” of EHRs and qualify for ARRA reimbursements. As a result of ourobtaining this certification, the ARRA has had and should continue to have a positive impact on our business andthe businesses of the community hospitals that comprise our target market.

Health Care Reform

In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act and theHealth Care and Education Reconciliation Act of 2010, collectively referred to as the “Health Reform Laws.”This sweeping legislation implements changes to the healthcare and health insurance industries over the next

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several years through 2015, with the ultimate goal of requiring substantially all U.S. citizens and legal residentsto have qualifying health insurance coverage by 2014 and providing the means by which it will be madeavailable to them. We anticipate that the Health Reform Laws will have little direct impact on our internaloperation but may have a significant impact on the business of our hospital customers. We have not been able todetermine at this point whether the impact will be positive, negative or neutral; however, it is likely that theHealth Reform Laws will affect hospitals differently depending upon the populations they service. Communityhospitals typically service higher uninsured populations than larger urban hospitals and rely more heavily onMedicare and Medicaid for reimbursement. It remains to be seen whether the increase in the insured populationsfor community hospitals, as well as the increase in Medicare and Medicaid reimbursements under ARRA forhospitals that implement EHR technology, will be enough to offset proposed cuts in Medicare and Medicaidreimbursements contained in the Health Reform Laws.

We believe healthcare initiatives will continue during the foreseeable future. If adopted, some aspects ofpreviously proposed reforms, such as further reductions in Medicare and Medicaid payments, could adverselyaffect the businesses of our customers and thereby harm our business.

Deficit Reduction

President Obama signed legislation on August 2, 2011, the Budget Control Act of 2011, to increase the U.S.debt ceiling. This legislation imposed significant cuts in federal spending over the next decade, as the specialbipartisan Congressional committee appointed under the legislation failed to take any action on deficit reduction.Our hospital customers rely heavily on Medicare and Medicaid programs to fund their operations. Any cuts tothese programs could negatively affect the business of our customers and our business.

2011 Financial Overview

Our gross revenues increased 13.2%, while our net income increased 37.9%. Cash flow from operationsincreased 70.8% due to an increase in net income and other liabilities, along with decreases in accountsreceivable. We continued to experience increased levels of customers seeking financing arrangements for systeminstallation during the year due to continued challenging economic conditions and unavailability of third-partycredit. We will grant financing arrangements to customers on a case-by-case basis depending upon variousaspects of the proposed contract and customer attributes. While our operating cash flows increased during theyear, we utilized $9.5 million of these funds to purchase our corporate headquarters that we had been leasing forthe past 20 years. We have maintained a strong cash position that we believe is sufficient to meet our operatingrequirements. We believe that a strong cash position enables us to compete better in the marketplace andmaintain the quality of our customer service and product offerings.

Revenues

The Company allocates revenue to its multiple element arrangements, including software and software-related services based on a hierarchy of evidence to support selling prices in accordance with generally acceptedaccounting principles. Revenue from general support agreements for post-contract support services (support andmaintenance) and information technology management and professional services are recognized by the Companyratably over the term of the agreement.

System Sales. Revenues from system sales are derived from the sale of information systems (includingsoftware, conversion and installation services, hardware, peripherals, forms and office supplies) to newcustomers and from the sale of new or additional products to existing customers. We do not record revenue uponthe execution of a sales contract. Upon the execution of a contract to purchase a system from us, each customerpays a non-refundable 10% deposit that is recorded as deferred revenue. The customer pays 40% of the purchaseprice for the software and the related installation, training and conversion when we install the system andcommence on-site training at the customer’s facility, which is likewise recorded as deferred revenue. When thesystem begins operating in a live environment, the remaining 50% of the system purchase price for each modulethat has been installed is payable. Revenue from the sale of the software perpetual license and the system

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installation and training is recognized on a module by module basis after the installation and training have beencompleted and the system is functioning as designed for each individual module. Revenue from the sale ofhardware is recognized upon shipment of the hardware to the customer.

Support and Maintenance. We also derive revenues from the provision of system support services, includingsoftware application support, hardware maintenance, continuing education and related services. Support servicesare provided pursuant to a support agreement under which we provide comprehensive system support and relatedservices in exchange for a monthly fee based on the services provided. The initial term of these contracts rangesfrom one to seven years, with a typical duration of five years. Upon expiration of the initial term, these contractsrenew automatically on a year-to-year basis thereafter until terminated. Revenues from support services arerecognized in the month when these services are performed.

We provide our products to some customers utilizing the “Software as a Service” model, or “SaaS.” Weprovide SaaS services on a remote access basis by storing and maintaining servers at our headquarters whichcontain customers’ patient and administrative data. These customers then access this data remotely in exchangefor a monthly fee. In addition, as part of our total information solution, we serve as an Internet service provider,or “ISP,” for some of our customers for a monthly fee. We also provide web-site design, hosting services, andother information technology management and professional services if needed. Revenues from our SaaS and ISPservices are recognized in the month when these services are performed.

Business Management Services. Our business management services include electronic billing, statementprocessing, payroll processing and business office management (primarily accounts receivable management).Most of these business management services are sold pursuant to one-year customer agreements, with automaticone year renewals until terminated. Revenues from business management services are recognized when theseservices are performed.

Reference is made to Note 2 to the financial statements for additional discussion of our revenue recognitionpolicies.

Costs of Sales

System Sales. The principal costs associated with the design, development, sale and installation of oursystems are employee salaries, benefits, travel expenses and certain other overhead expenses. These costs areexpensed as incurred. For the sale of equipment, we incur costs to acquire these products from the respectivedistributors or manufacturers. The costs related to the acquisition of equipment are capitalized into inventory andexpensed upon the sale of the equipment utilizing the average cost method.

Support and Maintenance. The principal costs associated with our system support and maintenance servicesare employee salaries, benefits and certain other overhead expenses. These costs are expensed as incurred.

Our employees that perform system installations also provide support and maintenance services. Weallocate their time equally between the two functions to provide them with an equal amount of time at homeproviding support services versus travelling away from home performing system installations. As such, salaryrelated expenses are allocated between cost of system sales and cost of support and maintenance services basedupon an estimate of the percentage of time employees spend performing each function. We had 572 softwareinstallation and support employees as of December 31, 2011 compared to 505 as of December 31, 2010.

Business Management Services. The principal cost related to our statement processing services is postage.The principal costs related to our electronic billing services are employee related expenses, such as salaries andbenefits, and long distance telecommunication fees. Supplies and forms represent an additional cost associatedwith our business management services. These costs are expensed as incurred.

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Results of Operations

The following table sets forth certain items included in our results of operations for each of the three yearsin the period ended December 31, 2011, expressed as a percentage of our total revenues for these periods (dollaramounts in thousands):

Year Ended December 31,

2011 2010 2009

Amount % Sales Amount % Sales Amount % Sales

INCOME DATA:Sales revenues:

System sales . . . . . . . . . . . . . . . . . . . . . . . . . . $ 70,644 40.7% $ 61,253 40.0% $ 42,455 33.2%Support and maintenance . . . . . . . . . . . . . . . 67,557 38.9% 59,259 38.7% 55,885 43.7%Business management services . . . . . . . . . . . 35,275 20.3% 32,735 21.4% 29,402 23.0%

Total sales revenues . . . . . . . . . . . . . . . . . . . . . . . . 173,476 100.0% 153,247 100.0% 127,742 100.0%Costs of sales:

System sales . . . . . . . . . . . . . . . . . . . . . . . . . . 47,603 27.4% 46,801 30.6% 35,822 28.1%Support and maintenance . . . . . . . . . . . . . . . 27,239 15.7% 23,923 15.6% 21,628 16.9%Business management services . . . . . . . . . . . 19,223 11.1% 18,139 11.8% 17,033 13.3%

Total costs of sales . . . . . . . . . . . . . . . . . . . . . . . . . 94,065 54.2% 88,863 58.0% 74,483 58.3%

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,411 45.8% 64,384 42.0% 53,259 41.7%Operating expenses:

Sales and marketing . . . . . . . . . . . . . . . . . . . . 13,413 7.8% 11,605 7.7% 9,081 7.2%General and administrative . . . . . . . . . . . . . . 24,703 14.2% 23,682 15.5% 20,809 16.3%

Total operating expenses . . . . . . . . . . . . . . . . . . . . 38,116 22.0% 35,287 23.0% 29,890 23.4%

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . 41,295 23.8% 29,097 19.0% 23,369 18.3%Other income (expense):

Interest income . . . . . . . . . . . . . . . . . . . . . . . 667 0.4% 674 0.4% 728 0.6%

Total other income . . . . . . . . . . . . . . . . . . . . . . . . . 667 0.4% 674 0.4% 728 0.6%

Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . 41,962 24.2% 29,771 19.4% 24,097 18.9%Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,129 9.3% 11,033 7.2% 8,914 7.0%

Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,833 14.9% $ 18,738 12.2% $ 15,183 11.9%

2011 Compared to 2010

Revenues. Total revenues increased by 13.2%, or $20.2 million. This was largely attributable to an increasein system sales of clinical applications to existing customers attempting to attain “meaningful use” of EHRsunder the ARRA, as well as an increase in support fees for these added clinical applications.

System sales revenues increased by 15.3%, or $9.4 million. We completed financial and patient softwaresystem installations at 17 new hospital clients in 2011, compared to installations at 44 new hospital clients in2010. System sales to existing customers in 2011 was 75.4% of total revenues as compared to 64.0% for 2010.We encountered many hospitals deferring IT system purchases in 2011 until they had further informationregarding reimbursement of these expenditures under the ARRA. This deferral resulted in fewer systeminstallations in 2011. Despite the reduction of new system installations, we were still able to increase revenuesdue to high levels of clinical application installations by our existing customers in order to meet the meaningfuluse provisions of the ARRA.

Support and maintenance revenues increased by 14.0%, or $8.3 million. The increase in revenues wasprimarily attributable to an increase in customers adding clinical systems which require additional support andmaintenance services. We had 657 customers at December 31, 2011, compared to 670 at December 31, 2010, due

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to the loss in 2011 of a hospital syndicate with multiple facilities. SaaS revenues increased by 177.4%, or$1.4 million, while ISP services revenues did not change significantly from 2010. We had 17 customers withSaaS agreements at December 31, 2011 compared to 12 at December 31, 2010. We had 4 customers buy out theirSaaS agreements during 2011, which contributed $1.3 million to system sales revenue in 2011.

Business management service revenues increased by 7.8%, or $2.5 million. This increase was due to thefollowing: a 15.7%, or $1.3 million, increase in private pay receivable management services, a 5.1%, or $0.5million, increase in electronic billing and statement outsourcing services, and a 27.3%, or $0.7 million, increasein eligibility and medical necessity checking services and connection fees. We were providing our full suite ofbusiness management services to 33 customers at December 31, 2011, compared to 30 customers atDecember 31, 2010.

Costs of Sales. Total costs of sales increased by 5.9%, or $5.2 million. As a percentage of revenues, cost ofsales decreased to 54.2% from 58.0%.

Cost of system sales increased by 1.7%, or $0.8 million. The gross margin on system sales increased to32.6% from 23.6%. As a percentage of system sales, payroll and related expenses remained relatively stable at34.1% compared to 34.9% in 2010; travel expense decreased to 15.2% from 16.5%; cost of software increased to4.5% compared to 4.2%; and cost of equipment decreased to 12.4% compared to 19.2% in 2010, as add-on salesgenerally require less equipment investment. Year-over-year, payroll and related costs increased 13.1%, or $2.8million, cost of equipment decreased 25.5%, or $3.0 million, cost of software increased 23.1%, or $0.6 million,and travel and related costs increased 6.4%, or $0.6 million.

Cost of support and maintenance increased 13.9%, or $3.3 million. The gross margin on support andmaintenance revenues remained stable at 59.7% compared to 59.6% for 2010. Year-over-year, the increase in thecost of support and maintenance was due to an increase in payroll and related costs of 16.4%, or $3.4 million, asthe result of additional personnel.

Our costs associated with business management services increased 6.0%, or $1.1 million. The gross marginon business management services increased to 45.5% compared to 44.6% for 2010 due to economies of scale ofour existing business management staff across a larger customer base. Payroll and related expenses increased$1.6 million due to additional employees, which was offset by a $0.8 million decrease in temporary laborexpense. Occupancy costs increased $0.3 million due to a full year of rent expense in the new facility to houseour business management service personnel that opened in June 2010.

Sales and Marketing Expenses. Sales and marketing expenses increased 15.6%, or $1.8 million. Theincrease was attributable to increased sales commission expense and increased salaries as a result of additionalpersonnel. Advertising expenses increased approximately $0.3 million as the result of a corporate logo changeand related expenses.

General and Administrative Expenses. General and administrative expenses increased 4.3%, or $1.0 million.Bad debt expense increased $0.4 million, as the Company changed its calculation of allowance for bad debt inorder to better reflect historical experience. Depreciation expense increased 48.1%, or $0.6 million, as the resultof a full year of depreciation of our new business management services facility and the depreciation of ourcorporate headquarters facility, which we purchased on December 13, 2011. Group health insurance expensedecreased slightly by $0.2 million during 2011 as the result of positive claims experience. Expenses related toour customer user group decreased by $0.5 million due to our hosting of this group’s annual convention inMobile, Alabama in 2011 rather than in Chicago, Illinois in 2010.

As a result of the foregoing factors, income before taxes increased by 40.9%, or $12.2 million.

Income Taxes. Our effective income tax rate for the years ended December 31, 2011 and 2010 was 38.4%and 37.1%, respectively. We utilized research and development tax credits to lower our effective tax rate in 2011and 2010. We anticipate our effective income tax rate in 2012 to be approximately 38%.

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2010 Compared to 2009

Revenues. Total revenues increased by 20.0%, or $25.5 million. This was largely attributable to an increasein system sales of clinical applications to existing customers attempting to attain “meaningful use” of EHRsunder the ARRA.

System sales revenues increased by 44.3%, or $18.8 million. We completed financial and patient softwaresystem installations at 44 new hospital clients in 2010, compared to installations at 33 new hospital clients in2009. System sales to existing customers in 2010 was 64.0% of total revenues as compared to 66.8% for 2009.

Support and maintenance revenues increased by 6.0%, or $3.4 million. The increase in revenues fromsupport and maintenance was attributable to an increase in recurring revenues as a result of additional supportand maintenance services to existing customers. We had 670 customers at December 31, 2010, compared to 652at December 31, 2009. SaaS revenues increased by 15.53%, or $0.4 million, while ISP services revenuesdeclined slightly during the year. We had 12 customers with SaaS agreements at December 31, 2010 compared to0 at December 31, 2009.

Business management service revenues increased by 11.3%, or $3.3 million. Business management servicerevenues increased as a result of continued growth in accounts receivable management, insurance follow-up andcontract management services. Electronic billing revenues increased 3.6%, or $0.1million, and business officeservices increased 16.4%, or $3.0 million. We were providing our full suite of business management services to30 customers at December 31, 2010, compared to 26 customers at December 31, 2009.

Costs of Sales. Total costs of sales increased by 19.3%, or $14.4 million. As a percentage of revenues, costof sales decreased slightly to 58.0% from 58.3%.

Cost of system sales increased by 30.6%, or $11.0 million. The increase in cost of system sales was due toan increase in system installations during the year. The gross margin on system sales increased to 23.6% from15.6%. As a percentage of system sales, payroll and related expenses decreased to 34.9% from 43.9% as a resultof higher utilization of employees performing system installations versus support and maintenance; travelexpense decreased to 16.5% from 17.3%; cost of software as a percentage of system sales increased to 4.2% from2.6% due to the purchase of additional third-party software licenses in 2010 to add functionality to ourcustomers’ operating system environments; and cost of equipment as a percentage of system sales increased to19.2% compared to 18.8%, due to increased supplier prices. Year over year, payroll and related costs increased14.8%, or $2.8 million, cost of equipment increased 47.5%, or $3.9 million, cost of software increased 132.5%,or $1.5 million, and travel and related costs increased 38.1%, or $2.8 million.

Cost of support and maintenance increased 10.6%, or $2.3 million. The gross margin on support andmaintenance revenues decreased to 59.6% from 61.3% . Year over year, the increase in the cost of support andmaintenance was due to an increase in payroll and related costs of 14.2%, or $2.6 million, as the result ofadditional personnel. Because the same employee groups that perform system installations also provide supportand maintenance services, the gross margins for the two services can fluctuate inversely as employees spendmore time performing system installations, while the allocation of their salaries remains the same.

Our costs associated with business management services increased 6.5%, or $1.1 million. The gross marginon business management services increased to 44.6% from 42.1% due to the realization of economies of scale ofour existing business management staff across a larger customer base. Payroll and related expenses increased$0.5 million due to additional employees hired to support our growing business office management services.Occupancy costs increased $0.3 million due to the opening of our new facility to house our business managementservice in June 2010. Postage costs increased $0.1 million as a result of a postage rate increase in May 2010.

Sales and Marketing Expenses. Sales and marketing expenses increased 27.8%, or $2.5 million. Theincrease was attributable to increased sales commission expense.

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General and Administrative Expenses. General and administrative expenses increased 13.8%, or $2.8million. Group health insurance expense increased $0.8 million during the year as the result of negative claimsexperience. We began an employee wellness program in 2009 to hopefully stem the trend of increasing healthcare costs. Expenses for this program cost approximately $0.2 million in 2010. Legal and accounting expenseincreased $0.4 million during the year as the result of a non-recurring expense related to an internal investigationconducted by the Company in 2010. Expenses related to our customer user group increased $0.3 million due tothe hosting of its annual convention in a more expensive location in 2010.

As a result of the foregoing factors, income before taxes increased by 23.5%, or $5.7 million.

Income Taxes. Our effective income tax rate for the years ended December 31, 2010 and 2009 was 37.1%and 37.0%, respectively. We utilized research and development tax credits to lower our effective tax rate in 2010and 2009. We also utilized in 2009 employment tax credits made available under the Gulf Opportunity Zone Actof 2005, related to Hurricane Katrina, but this credit was not renewed for 2010.

Liquidity and Capital Resources

As of December 31, 2011, we had $6.7 million in cash and cash equivalents and $16.5 million in investments.Management believes that cash and investments plus cash generated from our normal operating activities should beadequate to fund our business through the remainder of 2012. Our principal source of liquidity has been cashprovided by operating activities. Cash provided by operating activities has been used primarily to fund the growth inour business and return cash to our shareholders in the form of dividends. Because of our cash position, our Boardof Directors decided to begin paying a quarterly dividend in 2003. We declared and paid dividends in the aggregateamount of $15.9 million in 2011, $15.8 million in 2010 and $15.8 million in 2009. We believe that payingdividends is an effective way of providing an investment return to our stockholders and a beneficial use of our cash.However, the declaration of dividends by CPSI is subject to the discretion of our Board of Directors. Our Board ofDirectors will continue to take into account such matters as general business conditions, our financial results andsuch other factors as our Board of Directors may deem relevant.

Net cash provided by operating activities totaled $33.5 million, $19.6 million and $8.8 million for 2011,2010 and 2009, respectively. The increase in net cash provided by operating activities in 2011 predominantlyresulted from an increase in net income, a decrease in receivables and an increase in other liabilities.

Net cash used in investing activities totaled $14.0 million, $5.3 million and $2.2 million for 2011, 2010 and2009, respectively. In 2011, we purchased $10.8 million of property and equipment, $9.5 million of whichrelated to the purchase of our corporate headquarters which we had previously been leasing. In 2010, we spentapproximately $3.0 million for the build-out and furnishing of our new business management services operationsfacility. We also purchased investments in the net amount of $0.2 million in 2011 which are classified asavailable for sale. In 2011, we had net purchases of investments in the amount of $3.2 million which areclassified as available for sale. We anticipate the need for approximately $3.0 million to $4.0 million in capitalexpenditures for 2012, including $2.0 million for the addition of office space in Alabama.

Net cash used in financing activities totaled $15.8 million, $15.8 million and $14.0 million for 2011, 2010and 2009, respectively. We declared and paid dividends in the aggregate amount of $15.9 million, $15.8 millionand $15.8 million during 2011, 2010 and 2009, respectively. During 2009, we received proceeds of $1.3 millionand a tax benefit of $0.4 million from the exercise of employee stock options.

Our days sales outstanding, which represents the average collection time for accounts receivable, for theyears 2011, 2010 and 2009 were 45, 60 and 56 days, respectively.

We currently do not have a bank line of credit or other credit facility in place. Because we have no debt, weare not subject to contractual restrictions or other influences on our operations, such as payment demands andrestrictions on the use of operating funds that are typically associated with debt. If we borrow money in thefuture, we will likely be subject to operating and financial covenants that could limit our ability to operate as

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profitably as we have in the past. Defaults under applicable loan agreements could result in the demand bylenders for immediate payment of substantial funds and substantial restrictions on expenditures, among otherthings. Due to the current economic recession and uncertainty surrounding credit markets and tightened lendingstandards, additional capital, if needed, may not be available on terms favorable to the Company, or at all.

Related Party Transactions

On December 13, 2011, we purchased our corporate campus headquarters, including 16.5 acres of land onwhich the headquarters is located, in Mobile, Alabama from a related party, C.P. Investments, Inc., an Alabamacorporation, for $9.5 million. The stockholders of C.P. Investment include, among others, Michael K. Muscat,Jr., who is one of our executive officers, and his siblings, Ellen M. Harvey and Susan M. Slaton. Prior to thepurchase, we leased the facilities from C.P. Investments, Inc. In 2011, we made total lease payments in theamount of $1,900,810 to C.P. Investments, Inc. These lease agreements were all cancelled simultaneously withthe purchase. The purchase price for the corporate campus headquarters and 16.5 acres of land was determinedfollowing receipt of three separate independent third-party appraisals of the property.

Contractual Obligations

Our real estate leases are the only material contractual obligations requiring payments in the future. Ourpayments under these leases subsequent to December 31, 2011, are set forth below:

Payment due by period

Contractual Obligations Total Less than 1 year 1-3 Years 3-5 YearsMore than 5

years

Operating lease obligations . . . . . . . . . . . . . . . . . $1,599,594 517,921 904,802 176,871 —

The table above excludes any amounts related to the $731,346 of unrecognized tax benefit as the Companycannot make a reasonably reliable estimate of the periods of cash settlements with the respective taxingauthorities. See Note 5 to the financial statements for additional information.

Off-Balance Sheet Arrangements

Our only off-balance sheet arrangement, as defined by Item 303(a)(4) of SEC Regulation S-K, consists ofour guarantee of certain lease obligations of Solis Healthcare, LP (“Solis Healthcare”) to Winthrop ResourcesCorporation (“Winthrop”) under a lease agreement. Solis Healthcare purchased a software system from theCompany and then entered into a sale-leaseback transaction with Winthrop in the first quarter of 2008. Weprovided this guarantee in order to facilitate Solis Healthcare in leasing the new system.

The lease has an initial term of five years and continues from year-to-year thereafter until terminated. Weare contingently liable as guarantor under the lease such that, if at any time prior to the termination of the lease,Solis Healthcare (i) enters into bankruptcy or (ii) defaults for more than 60 days in its payments or performanceunder the lease, we will be obligated to perform under the guaranty by making the required lease payments,including late fees and penalties. The guaranty runs for the entire term of the lease; however, the maximumpotential amount of future payments that we would be required to make to Winthrop under the guaranty is$933,360, the balance of the lease as of December 31, 2011, plus any fees and costs that Winthrop incurs incollecting amounts due under the lease (including attorney’s fees and costs). Due to the contingent nature of theguaranty, the maximum amount of the guaranty is not recorded on our balance sheet; however, when necessary,we record reserves to cover potential losses. A liability in the amount of $27,943, the amortized fair value of theguaranty, is recorded on our balance sheet as an other accrued liability at December 31, 2011. See Note 11 to thefinancial statements for additional information.

Critical Accounting Policies

General. Our discussion and analysis of our financial condition and results of operations are based on ourfinancial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America. We are required to make some estimates and judgments that affect the preparation

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of these financial statements. We base our estimates on historical experience and on various other assumptionsthat we believe to be reasonable under the circumstances, but actual results may differ from these estimates underdifferent assumptions or conditions.

Revenue Recognition. We recognize revenue in accordance with the accounting principles required by theSoftware topic and Revenue Recognition subtopic of the Financial Accounting Standards Board (“FASB”)Accounting Standards Codification (the “Codification”) and those prescribed by the SEC. These standardsrequire that four basic criteria must be met before revenues can be recognized: (1) persuasive evidence that anarrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed anddeterminable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on ourjudgment regarding the fixed nature of the fee charged for services rendered and products delivered and thecollectibility of those fees. Once the above criteria have been met, we allocate revenue to our products andservices based on their relative selling prices. Should changes in conditions cause us to determine the abovecriteria are not met for certain future transactions, revenues recognized for any reporting period could beadversely affected. See Note 2 to the financial statements for further discussion of our revenue recognitionpolicies.

Allowance for Doubtful Accounts. Trade accounts receivable are stated at the amount the Company expectsto collect and do not bear interest. The collectibility of trade receivable balances is regularly evaluated based on acombination of factors such as customer credit-worthiness, past transaction history with the customer, currenteconomic industry trends and changes in customer payment patterns. If it is determined that a customer will beunable to fully meet its financial obligation, such as in the case of a bankruptcy filing or other material eventsimpacting its business, a specific reserve for bad debt is recorded to reduce the related receivable to the amountexpected to be recovered.

Allowance for Credit Losses. The Company leases its information and patient care systems to certainhealthcare providers under sales-type leases. The Company establishes an allowance for credit losses for thesefinancing receivables based on the historical level of customer defaults under such financing arrangements.Reference is made to Note 8 to the financial statements for further information about our financing receivables.

Stock-Based Compensation. The Company accounts for stock-based compensation according to the FASBCodification topic, Compensation – Stock Compensation. Stock-based compensation is measured at the grantdate based on the fair value of the award, and is recognized as an expense over the employee’s requisite serviceperiod. See Note 6 to the financial statements for further discussion of the impact on the Company’s earnings.

Estimates. The Company uses estimates to record certain transactions and liabilities. These estimates aregenerally based on management’s best judgment, past experience, and utilization of third party services such asactuarial and other expert services. Because these estimates are subjective and variable, actual results could differsignificantly from these estimates. Significant estimates included in our financial statements include those forself-insurance reserves under our health insurance plan, reserves for uncertain tax positions, bad debt and creditallowances, legal liability exposure or lack thereof, and accrued expenses.

Backlog

Backlog consists of revenues we reasonably expect to recognize over the next twelve months under existingcontracts. The revenues to be recognized may relate to a combination of one-time fees for system sales, andrecurring fees for support, business management, SaaS and ISP services. As of December 31, 2011, we had atwelve-month backlog of approximately $35 million in connection with non-recurring system purchases andapproximately $103 million in connection with recurring payments under support, business management andSaaS contracts. Our backlog increase is the result of new contracts signed in 2011 to be installed in 2012, as wellas an increase in our customer base for recurring business.

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Quantitative and Qualitative Disclosures about Market and Interest Rate Risk

Our exposure to market risk relates primarily to the potential change in the value of our investment portfolioas a result of fluctuations in interest rates. The primary purpose of our investment activities is to preserveprincipal while maximizing the income we receive from our investments without significantly increasing risk ofloss. As of December 31, 2011, our investment portfolio consisted of a variety of financial instruments,including, but not limited to, money market securities and high quality government and corporate obligations. Itis our intent to ensure the safety and preservation of our invested principal funds by limiting default risk, marketrisk, and reinvestment risk. We do not hold financial instruments for trading or other speculative purposes. Thesecurities in our investment portfolio are classified as available-for-sale and, consequently, are recorded on ourbalance sheet as a current asset at fair market value with their unrealized gain or loss reflected as a component ofaccumulated other comprehensive income (loss) in stockholders’ equity.

Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk.Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, whilefloating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, ourfuture investment income may fall short of expectation due to changes in interest rates or we may suffer losses inprincipal if forced to sell securities which have declined in market value due to changes in interest rates.

We believe that the market risk arising from our holdings of these financial instruments is minimal. Due tothe conservative allocation of our investment portfolio, we do not believe that an immediate 10% increase ininterest rates would have a material effect on the market value of our portfolio. Since we have the ability toliquidate this portfolio, we do not expect our operating results or cash flows to be materially effected to anysignificant degree by a sudden change in market interest rates on our investment portfolio. We do not utilizederivative financial instruments to manage the interest rate risks associated with our investments.

The table that follows presents fair values of principal amounts and weighted average interest rates for ourinvestment portfolio as of December 31, 2011 and 2010.

Aggregate Fair Value

WeightedAverage

Interest Rate

2011 2010 2011 2010

Cash and Cash Equivalents:Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,664,482 $2,939,839 0.00% 0.00%

Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $6,664,482 $2,939,839

Short-Term Investments:(1)Accrued income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 102,510 $ 119,574 0.00% 0.00%Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,474,680 71,782 0.19% 0.22%U.S. Treasury bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 330,000 — 0.21%Obligations of the U.S. Treasury, U.S Government corporations

and agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,865,906 1,875,448 0.77% 2.20%Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,302,715 2,686,791 4.33% 4.67%

Total short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,745,811 $5,083,595

Long-Term Investments:(2)Obligations of the U.S. Treasury, U.S Government corporations

and agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,089,984 $3,350,091 1.74% 0.82%Mortgage backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,832 121,571 2.00% 5.00%Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,548,061 4,846,666 3.36% 4.36%

Total long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,740,877 $8,318,328

(1) Reflects instruments with a contractual maturity of less than one year.(2) Reflects instruments with a contractual maturity of one year or more.

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Recent Accounting Pronouncements

Reference is made to Note 2 to the financial statements for a discussion of accounting pronouncements thathave been recently issued which we have not yet adopted.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this item is contained in Item 7 herein under the heading “Quantitative andQualitative Disclosures about Market and Interest Rate Risk.”

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements

Page

Management’s Report on Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Report of Grant Thornton LLP, Independent Registered Public Accounting Firm, on FinancialStatements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Report of Grant Thornton LLP, Independent Registered Public Accounting Firm, on Internal Control OverFinancial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Balance Sheets — December 31, 2011 and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Statements of Income — Years ended December 31, 2011, 2010 and 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Statements of Stockholders’ Equity — Years ended December 31, 2011, 2010 and 2009 . . . . . . . . . . . . . . . 51

Statements of Cash Flows — Years ended December 31, 2011, 2010 and 2009 . . . . . . . . . . . . . . . . . . . . . . 52

Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Index to Financial Statement Schedules

Schedule II — Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

All other schedules to the financial statements required by Article 9 of Regulation S-X are not applicableand therefore have been omitted.

45

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal control over financialreporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Computer Programs andSystems, Inc.’s (“CPSI”) internal control over financial reporting is designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. CPSI’s internal control over financial reportingincludes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of CPSI;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accounting principles, and that receipts andexpenditures of CPSI are being made only in accordance with authorizations of management and directorsof CPSI; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,use or disposition of CPSI’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

Management assessed the effectiveness of CPSI’s internal control over financial reporting as ofDecember 31, 2011. In making this assessment, management used the criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

Based on our assessment and those criteria, management believes that CPSI maintained effective internalcontrol over financial reporting as of December 31, 2011.

The independent registered public accounting firm, Grant Thornton LLP, has audited the financialstatements as of and for the year ended December 31, 2011, and has also issued their report on the effectivenessof the Company’s internal control over financial reporting included in this report on page 48.

46

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMON FINANCIAL STATEMENTS

To the Board of Directors and ShareholdersComputer Programs and Systems, Inc.:

We have audited the accompanying balance sheets of Computer Programs and Systems, Inc. (a Delawarecorporation) as of December 31, 2011 and 2010, and the related statements of income, stockholders’ equity, andcash flows for each of the three years in the period ended December 31, 2011. Our audits of the basic financialstatements included the financial statement schedule listed in the index appearing under Item 8. These financialstatements and financial statement schedule are the responsibility of Computer Programs and Systems, Inc.’smanagement. Our responsibility is to express an opinion on these financial statements and financial statementschedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financialposition of Computer Programs and Systems, Inc. as of December 31, 2011 and 2010, and the results of itsoperations and its cash flows for each of the three years in the period ended December 31, 2011, in conformitywith accounting principles generally accepted in the United States of America. Also, in our opinion, the relatedfinancial statement schedule, when considered in relation to the basic financial statements taken as a whole,presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board(United States), Computer Programs and Systems, Inc.’s internal control over financial reporting as ofDecember 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 12,2012 expressed an unqualified opinion.

/s/ GRANT THORNTON LLP

Atlanta, GeorgiaMarch 12, 2012

47

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Board of Directors and Shareholders ofComputer Programs and Systems Inc.:

We have audited Computer Programs and Systems, Inc.’s (a Delaware Corporation) internal control overfinancial reporting as of December 31, 2011, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Computer Programs and Systems, Inc.’s management is responsible for maintaining effective internal controlover financial reporting and for its assessment of the effectiveness of internal control over financial reporting,included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Ourresponsibility is to express an opinion on Computer Programs and Systems, Inc.’s internal control over financialreporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance aboutwhether effective internal control over financial reporting was maintained in all material respects. Our auditincluded obtaining an understanding of internal control over financial reporting, assessing the risk that a materialweakness exists, testing and evaluating the design and operating effectiveness of internal control based on theassessed risk, and performing such other procedures as we considered necessary in the circumstances. We believethat our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. A company’s internal control over financial reportingincludes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation of financial statements in accordancewith generally accepted accounting principles, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of the company; and (3) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

In our opinion, Computer Programs and Systems, Inc. maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board(United States), the balance sheets of Computer Programs and Systems, Inc. as of December 31, 2011 and 2010and the related statements of income, stockholder’s equity, and cash flows for each of the three years in theperiod ended December 31, 2011, and our report dated March 12, 2012, expressed an unqualified opinion.

/s/ GRANT THORNTON LLPAtlanta, GeorgiaMarch 12, 2012

48

COMPUTER PROGRAMS AND SYSTEMS, INC.

Balance Sheets

December 31,2011

December 31,2010

AssetsCurrent assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,664,482 $ 2,939,839Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,486,688 13,401,923Accounts receivable, net of allowance for doubtful accounts of

$1,276,000 and $969,000, respectively . . . . . . . . . . . . . . . . . . . . . . . . 21,521,260 25,472,529Financing receivables, current portion, net . . . . . . . . . . . . . . . . . . . . . . . 3,780,621 3,114,201Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,838,937 1,782,743Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,543,624 2,244,299Prepaid income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 834,750 102,250Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 498,172 562,210

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,168,534 49,619,994Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,848,276 936,026Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,779,673 —Maintenance equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,638,219 4,248,439Computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,391,704 8,305,850Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,937,524 3,068,854Office furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,959,534 2,858,967Automobiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190,542 158,042

30,745,472 19,576,178Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,326,241) (10,893,120)

Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,419,231 8,683,058Financing receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,056,748 4,432,277

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,644,513 $ 62,735,329

Liabilities and Stockholders’ EquityCurrent liabilities:

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,469,157 $ 2,617,377Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,589,792 4,469,507Accrued vacation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,211,693 2,951,841Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,399,996 4,446,727

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,670,638 14,485,452

Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,589,838 1,785,854

Stockholders’ equity:Common stock, $0.001 par value; 30,000,000 shares authorized;

11,063,220 and 10,962,874 shares issued and outstanding . . . . . . . . . 11,063 10,963Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,582,108 30,549,149Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . 7,380 58,903Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,783,486 15,845,008

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,384,037 46,464,023

Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,644,513 $ 62,735,329

See accompanying notes.

49

COMPUTER PROGRAMS AND SYSTEMS, INC.

Statements of Income

Year ended December 31,

2011 2010 2009

Sales revenues:System sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 70,643,877 $ 61,252,949 $ 42,455,364Support and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,557,386 59,259,133 55,884,446Business management services . . . . . . . . . . . . . . . . . . . . . . . 35,275,081 32,735,162 29,402,215

Total sales revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173,476,344 153,247,244 127,742,025

Costs of sales:System sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,602,817 46,800,755 35,821,890Support and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,238,779 23,923,099 21,627,822Business management services . . . . . . . . . . . . . . . . . . . . . . . 19,223,543 18,139,259 17,033,502

Total costs of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,065,139 88,863,113 74,483,214

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,411,205 64,384,131 53,258,811

Operating expenses:Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,413,587 11,605,123 9,081,393General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . 24,702,679 23,681,584 20,808,616

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,116,266 35,286,707 29,890,009

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,294,939 29,097,424 23,368,802

Other income:Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 667,564 673,224 727,816

Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,962,503 29,770,648 24,096,618Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,129,113 11,032,795 8,913,335

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,833,390 $ 18,737,853 $ 15,183,283

Net income per share - basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.34 $ 1.71 $ 1.39

Net income per share - diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.34 $ 1.71 $ 1.39

Weighted average shares outstandingBasic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,033,804 10,962,874 10,953,747Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,033,804 10,962,874 10,955,167

See accompanying notes.

50

COMPUTER PROGRAMS AND SYSTEMS, INC.

Statements of Stockholders’ Equity

CommonShares

CommonStock

AdditionalPaid-inCapital

AccumulatedOther

ComprehensiveIncome(Loss)

RetainedEarnings

TotalStockholders’

Equity

Balance at December 31, 2008 . . . 10,893,751 $10,894 $27,006,573 $ 56,715 $ 13,484,988 $ 40,559,170Net income . . . . . . . . . . . . . . . . . . — — — — 15,183,283 15,183,283Issuance of common stock . . . . . . 79,006 79 1,303,520 — — 1,303,599Unrealized gain on investments

held for sale,net of tax . . . . . . . — — — 43,388 — 43,388Stock-based compensation . . . . . . — — 919,980 — — 919,980Dividends . . . . . . . . . . . . . . . . . . . — — — — (15,767,461) (15,767,461)Income tax benefit from restricted

stock dividends . . . . . . . . . . . . . — — 30,482 — — 30,482Income tax benefit from stock

option exercises . . . . . . . . . . . . — — 418,830 — — 418,830

Balance at December 31, 2009 . . . 10,972,757 $10,973 $29,679,385 $100,103 $ 12,900,810 $ 42,691,271

Net income . . . . . . . . . . . . . . . . . . — — — — 18,737,853 18,737,853Forefeiture of common stock . . . . (9,883) (10) 10 — — —Unrealized loss on investments

held for sale,net of tax . . . . . . . — — — (41,200) — (41,200)Stock-based compensation . . . . . . — — 855,819 — — 855,819Dividends . . . . . . . . . . . . . . . . . . . — — — — (15,793,655) (15,793,655)Income tax benefit from restricted

stock dividends . . . . . . . . . . . . . — — 13,935 — — 13,935

Balance at December 31, 2010 . . . 10,962,874 $10,963 $30,549,149 $ 58,903 $ 15,845,008 $ 46,464,023

Net income . . . . . . . . . . . . . . . . . . — — — — 25,833,390 25,833,390Unrealized loss on investments

held for sale,net of tax . . . . . . . — — — (51,523) — (51,523)Issuance of restricted stock . . . . . 100,346 100 (100) — — —Stock-based compensation . . . . . . — — 928,224 — — 928,224Dividends . . . . . . . . . . . . . . . . . . . — — — — (15,894,912) (15,894,912)Income tax benefit from restricted

stock dividends . . . . . . . . . . . . . — — 42,266 — — 42,266Income tax benefit from restricted

stock . . . . . . . . . . . . . . . . . . . . . — — 62,569 — — 62,569

Balance at December 31, 2011 . . . 11,063,220 $11,063 $31,582,108 $ 7,380 $ 25,783,486 $ 57,384,037

See accompanying notes

51

COMPUTER PROGRAMS AND SYSTEMS, INC.

Statements of Cash Flows

Year ended December 31,

2011 2010 2009

Operating ActivitiesNet income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,833,390 $ 18,737,853 $ 15,183,283Adjustments to net income:

Provision for bad debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,436,549 1,077,250 1,076,491Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (452,891) 572,890 (166,942)Stock based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . 928,224 855,819 919,980Income tax benefit from stock option exercises . . . . . . . . . . . — — (418,830)Income tax benefit from restricted stock . . . . . . . . . . . . . . . . . (62,569) — —Income tax benefit from restricted stock dividends . . . . . . . . (42,266) (13,935) (30,482)Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500,324 1,853,724 1,772,327

Changes in operating assets and liabilities:Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,014,205 (6,843,741) (4,948,268)Financing receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (790,376) (251,022) (2,192,199)Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (445,974) (508,044) (1,475,326)Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,038 143,271 (204,216)Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (148,220) 405,292 382,580Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,120,285 886,637 (145,487)Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,213,121 1,946,176 (841,270)Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (627,665) 779,510 (99,360)

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . 33,540,175 19,641,680 8,812,281

Investing ActivitiesPurchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . (10,846,717) (5,092,047) (829,103)Purchases of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,178,738) (216,837) (2,826,331)Sale of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 1,500,000

Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . (14,025,455) (5,308,884) (2,155,434)

Financing ActivitiesProceeds from exercise of stock options, net . . . . . . . . . . . . . . . . . — — 1,303,599Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,894,912) (15,793,655) (15,767,461)Income tax benefit from stock option exercises . . . . . . . . . . . . . . . — — 418,830Income tax benefit from restricted stock . . . . . . . . . . . . . . . . . . . . . 62,569 — —Income tax benefit from restricted stock dividends . . . . . . . . . . . . 42,266 13,935 30,482

Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . (15,790,077) (15,779,720) (14,014,550)

Increase (Decrease) in cash and cash equivalents . . . . . . . . . . . . . . 3,724,643 (1,446,924) (7,357,703)

Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . 2,939,839 4,386,763 11,744,466

Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . $ 6,664,482 $ 2,939,839 $ 4,386,763

Supplemental disclosure of cash flow informationCash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ —Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,146,023 $ 9,513,193 $ 8,759,003Reclassification of inventory to property and equipment . . . . . . . . $ 389,780 $ 428,970 $ 1,145,960

See accompanying notes.

52

COMPUTER PROGRAMS AND SYSTEMS, INC.NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2011

1. NATURE OF OPERATIONS

Computer Programs and Systems, Inc. (CPSI or the Company) is a healthcare information technologysolutions provider which was formed and commenced operations in 1979. The Company provides, on anintegrated basis, enterprise-wide clinical management, access management, patient financial management, healthinformation management, strategic decision support, resource planning management and enterprise applicationintegration solutions to healthcare organizations throughout the United States. Additionally, CPSI provides otherinformation technology solutions, including business management services, remote hosting, networkingtechnologies and other related services. The Company operates in a single segment reporting to the chiefexecutive officer, based on the criteria of the Segment Reporting topic of the Financial Accounting StandardsBoard (“FASB”) Accounting Standards Codification (the “Codification”).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

Cash and cash equivalents can include time deposits and certificates of deposit with original maturities ofthree months or less that are highly liquid and readily convertible to a known amount of cash. These investmentsare stated at cost, which approximates market value, due to their short duration or liquid nature.

Investments

The Company accounts for investments in accordance with FASB Codification topic, Investments – Debtand Equity Securities. Accordingly, investments are classified as available-for-sale securities and are reported atfair value, with unrealized gains and losses excluded from earnings and reported in a separate component ofstockholders’ equity. The Company’s management determines the appropriate classifications of investments infixed maturity securities at the time of acquisition and re-evaluates the classifications at each balance sheet date.

Investments were comprised of the following at December 31, 2011:

AmortizedCost

UnrealizedGains

UnrealizedLosses

FairValue

Short term investments (cash and accruedincome) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,577,190 $ — $ — $ 1,577,190

Obligations of U.S. Treasury, U.S.government corporations and agencies . . . 5,944,885 11,369 364 5,955,890

Mortgaged-backed securities . . . . . . . . . . . . . 100,620 2,212 — 102,832Corporate bonds . . . . . . . . . . . . . . . . . . . . . . 8,851,895 32,971 34,090 8,850,776

$16,474,590 $46,552 $34,454 $16,486,688

Shown below are the amortized cost and estimated fair value of securities with fixed maturities atDecember 31, 2011, by contract maturity date. Actual maturities may differ from contractual maturities becauseissuers of certain securities retain early call or prepayment rights.

AmortizedCost

FairValue

Due in 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,717,366 $ 9,745,811Due in 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,103,754 4,096,220Due in 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,552,850 2,541,825Due thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,620 102,832

$16,474,590 $16,486,688

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Investments were comprised of the following at December 31, 2010:

AmortizedCost

UnrealizedGains

UnrealizedLosses

FairValue

Short term investments (cash and accruedincome) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 521,346 $ 10 $ — $ 521,356

Obligations of U.S. Treasury, U.S.government corporations and agencies . . . 5,212,786 13,819 1,066 5,225,539

Mortgaged-backed securities . . . . . . . . . . . . . 119,996 1,575 — 121,571Corporate bonds . . . . . . . . . . . . . . . . . . . . . . 7,451,233 89,665 7,441 7,533,457

$13,305,361 $105,069 $8,507 $13,401,923

Income Taxes

We account for income taxes in accordance with FASB Codification topic – Income Taxes. Under this topic,deferred income taxes are determined utilizing the asset and liability approach. This method gives considerationto the future tax consequences associated with differences between financial accounting and tax bases of assetsand liabilities. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in incomein the period that includes the enactment date. We recognize interest and penalties accrued related tounrecognized tax benefits in the statements of income under general and administrative expenses.

We also make a provision for uncertain income tax positions in accordance with the Income TaxesCodification topic. These provisions require that a tax position taken in a tax return be recognized in the financialstatements when it is more likely than not (i.e. a likelihood of more than fifty percent) that the position would besustained upon examination by tax authorities. A recognized tax position is then measured at the largest amountof benefit that is greater than fifty percent likely of being realized upon settlement. The topic also requires thatchanges in judgment that result in subsequent recognition, derecognition, or change in a measurement date of atax position taken in a prior annual period (including any related interest and penalties) be recognized as adiscrete item in the interim period in which the change occurs.

Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are stated at the amount the Company expects to collect and do not bear interest.The Company establishes a general allowance for doubtful accounts based on collections history. In the case of abankruptcy filing, a specific reserve for bad debt is recorded to reduce the related receivable to the amountexpected to be recovered.

Inventories

Inventories are stated at lower of cost or market using the average cost method. The Company’s inventoriesare composed of computer equipment, forms and supplies. For cash flow presentation, inventory used by theCompany and capitalized as property and equipment is shown as a change in inventory.

Property and Equipment

Property and equipment is recorded at cost, less accumulated depreciation. Additions and improvements toproperty and equipment that materially increase productive capacity or extend the life of an asset are capitalized.Maintenance, repairs and minor renewals are expensed as incurred. Upon retirement or other disposition of suchassets, the related costs and accumulated depreciation are removed from the respective accounts and anyresulting gain or loss is included in the results of operations.

Depreciation expense is computed using the straight-line method over the asset’s useful life, which isgenerally 5 years for computer equipment, furniture, and fixtures and 30 years for buildings. The Companyreviews for the possible impairment of long-lived assets whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. Depreciation expense is reported in the statement ofincome as a component of support and maintenance costs and operating expenses.

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Deferred Revenue

Deferred revenue represents amounts received from customers under licensing agreements andimplementation fees for which the revenue earnings process has not been completed.

Revenue Recognition

The Company recognizes revenue in accordance with accounting principles generally accepted in the UnitedStates of America, principally those required by the Software topic and Revenue Recognition subtopic of theCodification and those prescribed by the SEC.

The Company’s revenue is generated from three sources:

• the sale of information systems, which includes software, conversion and installation services,hardware, peripherals, forms and supplies;

• the provision of system support services, which includes software application support, hardwaremaintenance, continuing education, “Software as a Service” (or “SaaS”) products, Internet serviceprovider (“ISP”) products, and information technology management and professional services; and

• the provision of business management services, which includes electronic billing, statement processing,payroll processing and accounts receivable management.

System Sales and Support and Maintenance

The Company enters into contractual obligations to sell hardware, perpetual software licenses, installationand training services, and support and maintenance services. On average, the Company is able to complete asystem installation in 3 to 4 weeks. The methods employed by the Company to recognize revenue, which arediscussed by element below, achieve results materially consistent with the provisions of Accounting StandardsUpdate (“ASU”) 2009-13, Multiple-Deliverable Revenue Arrangements, due to the relatively short period duringwhich there are multiple undelivered elements, the relatively small amount of non-software related elements inthe system sale arrangements, and the limited number of contracts in-process at each reporting period. TheCompany recognizes revenue on the elements noted above as follows:

• Support and maintenance – we have established vendor-specific objective evidence (“VSOE”) of thefair value of our support and maintenance services by reference to the price our customers are requiredto pay for the services when sold separately via renewals. Support and maintenance revenue isrecognized on a straight line basis over the term of the maintenance contracts, generally three to fiveyears.

• Hardware – we recognize revenue for hardware upon shipment. The selling price of hardware is basedon management’s best estimate of selling price, which consists of cost plus a targeted margin.

• Software licenses and installation and training – the selling price of software licenses and installationand training is based on management’s best estimate of selling price. In determining management’sbest estimate of selling price, we consider the following: (1) competitor pricing, (2) supply and demandof installation staff, (3) overall economic conditions, and (4) our pricing practices as it relates todiscounts. The method of recognizing revenue for the perpetual license of the associated modulesincluded in the arrangement and the related installation and training services over the term the servicesare performed is on a module by module basis as the respective installation and training for eachspecific module is completed as this is representative of the pattern of provision of these services.

SaaS, ISP, and Other Professional IT Services

The Company accounts for SaaS contracts in accordance with the requirements of the Hosting Arrangementsection under the Software topic and Revenue Recognition subtopic of the Codification. The Codification statesthat the software elements of SaaS products should not be accounted for as a hosting arrangement “if thecustomer has the contractual right to take possession of the software at any time during the hosting period

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without significant penalty and it is feasible for the customer to either run the software on its own hardware orcontract with another party unrelated to the vendor to host the software.” Each SaaS contract includes a systempurchase and buyout clause, and this clause specifies the total amount of the system buyout. In addition, a clauseis included which states that should the system be bought out by the customer, the customer would be required toenter into a general support agreement (for post-contract support services) for the remainder of the original SaaSterm. Accordingly, the Company has concluded that SaaS customers do not have the right to take possession ofthe system without significant penalty (i.e., the purchase price of the system), and thus SaaS revenue of theCompany falls within the scope of the Hosting Arrangement section of the Codification. In accordance with SECregulations, revenue for SaaS arrangements is recognized when the services are performed.

The Company will occasionally provide ISP and other professional IT services. We consider these servicesto be non-software elements. The selling price of these services is based on third-party evidence of selling priceof similar services. Revenue from this element is recognized as the services are performed.

Business Management Services

Business management services consist of electronic billing services, statement processing services, accountsreceivable management services, payroll processing, contract management and insurance services. Whilebusiness management service arrangements are contracts separate from the system sale and support andmaintenance contracts, these contracts are sometimes executed within a short time frame of each other. Theselling price of these services is based on VSOE of fair value by reference to the rate our customers renew aswell as the rate the services are sold to customers when the business management services agreement is notexecuted within a short time frame. Because the pricing is transaction based (per unit pricing), customers arebilled and revenue recognized as services are performed based on transaction levels.

Stock Based Compensation

The Company accounts for stock based compensation according to the provisions of FASB Codificationtopic, Compensation – Stock Compensation, which establishes accounting for stock-based awards exchanged foremployee services. Accordingly, stock-based compensation cost is measured at grant date based on the fair valueof the award, and is recognized as an expense on a straight-line basis over the employee’s requisite serviceperiod.

Research and Development Costs

Research and development costs are expensed as incurred. Research and development costs totaledapproximately $2,452,000, $2,328,000 and $2,472,000 for the years ended December 31, 2011, 2010 and 2009,respectively. Research and development expense is included in cost of support and maintenance in theaccompanying statements of income.

Advertising

Advertising costs are expensed as incurred. Advertising expense was approximately $283,000, $57,000 and$15,000 for the years ended December 31, 2011, 2010 and 2009, respectively, and are recorded in sales andmarketing expenses in the accompanying statements of income.

Shipping and Handling Costs

Shipping and handling costs are expensed as incurred and included in general and administrative expenses.Shipping and handling costs totaled approximately $720,000, $1,042,000 and $898,000 for the years endedDecember 31, 2011, 2010 and 2009, respectively.

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Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in theUnited States of America requires that management make estimates and assumptions that affect the reportedamounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financialstatements and the reported revenues and expenses during the reporting periods. Actual results could differ fromthose estimates.

Accounting Standards Adopted by CPSI in 2011

Effective January 1, 2011, ASU 2009-14, Software: Certain Revenue Arrangements That Include SoftwareElements became effective for the Company. This update addresses revenue recognition in situations whereproducts or services are sold along with incidental software components. The update is effective prospectivelyfor revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.The provisions of this update did not have a material impact on the Company’s financial statements.

On January 1, 2011, the provisions of ASU 2009-13, Revenue Recognition: Multiple-Deliverable RevenueArrangements became effective for the Company. This update addresses the criteria for separating considerationin multiple-element arrangements. It requires companies allocating the overall consideration to each deliverableto use an estimated selling price of individual deliverables in the arrangement in the absence of vendor-specificobjective evidence or other third-party evidence of the selling price. The update is effective prospectively forrevenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Theprovisions of this update did not have a material impact on the Company’s financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

The Company has not identified any new standards required to be adopted in 2012 that we have determinedwill have a material impact on its financial statements.

In June 2011, the FASB issued guidance on the presentation of total comprehensive income, the componentsof net income, and the components of other comprehensive income. This guidance is intended to improve thecomparability, consistency and transparency of financial reporting and to increase the prominence of itemsreported in other comprehensive income. The guidance is effective for fiscal years, and interim periods withinthose years, beginning after December 15, 2011. We do not expect the adoption of this guidance to have amaterial impact on our financial statements.

On November 14, 2011, the FASB and IASB jointly issued their revised exposure draft (“ED”), RevenueFrom Contracts with Customers, as a proposed ASU. The proposed ASU outlines a single comprehensive modelfor entities to use in accounting for revenue arising from contracts with customers and would supersede the mostcurrent revenue recognition guidance. No current effective date for this proposed ASU has been issued nor hasthe Company determined whether this proposed ASU will have a material impact on its financial statements.

3. DETAILS OF BALANCE SHEET AMOUNTS

Other accrued liabilities are comprised of the following at December 31, 2011 and 2010:

2011 2010

Salaries and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,257,663 $2,380,523Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503,172 630,143Self-insurance reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 793,378 585,600Unrecognized tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 731,346 697,723Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114,437 152,738

$5,399,996 $4,446,727

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4. NET INCOME PER SHARE

The Company presents both basic and diluted earnings per share (“EPS”) amounts. Basic EPS is calculatedby dividing net income by the weighted average number of common shares outstanding during the periodpresented. Diluted EPS amounts are based upon the weighted average number of common and commonequivalent shares outstanding during the period presented. The difference between basic and diluted EPS issolely attributable to stock options. The Company uses the treasury stock method to calculate the impact ofoutstanding stock options. For the years ended December 31, 2011, 2010 and 2009, these dilutive shares on aweighted average basis were 0, 0 and 1,420, respectively.

5. INCOME TAXES

The Company accounts for income taxes in accordance with the FASB’s Codification topic, Income Taxes.These provisions require a company to determine whether it is more likely than not that a tax position will besustained upon examination based on the technical merits of the position. If the more-likely-than-not threshold ismet, a company must measure the tax position to determine the amount to recognize in the financial statements.

We applied these provisions to all tax positions for which the statute of limitations remained open. Areconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

2011 2010

Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $697,723 $536,717Additions based on tax positions related to the current year . . . . . . . . . . . . . . 70,935 108,246Additions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 52,760Reductions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . (37,312) —

Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $731,346 $697,723

The total amount of unrecognized tax benefits, if recognized, that would affect the effective tax rate is $731,346.

The Company classifies interest and penalties arising from the underpayment of income taxes in thestatements of income under general and administrative expenses. As of December 31, 2011, we had no accruedinterest or penalties related to uncertain tax positions as amounts are considered immaterial. The tax years 2004 –2010 remain open to federal examination and to other taxing jurisdictions to which we are subject. The federalreturns for the tax years 2004, 2005, and 2006 are currently under examination by the Internal Revenue Service,primarily in relation to research credits claimed on those returns by the Company.

It is reasonably possible that the amount of unrecognized tax benefits, inclusive of related interest, willchange in the next twelve months. At December 31, 2011, there is no estimated increase or decrease in theamount of unrecognized tax benefits.

Deferred income taxes arise from the temporary differences in the recognition of income and expenses fortax purposes. A valuation allowance is established when the Company believes that it is more likely than not thatsome portion of its deferred tax assets will not be realized. Deferred tax assets and liabilities are comprised of thefollowing at December 31, 2011 and 2010:

2011 2010

Deferred tax assets:Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 672,056 $ 468,806Accrued vacation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,252,560 1,151,218Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 334,383 368,015Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 629,906 325,122

Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,888,905 $2,313,161

Deferred tax liabilities:Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,718 $ 47,168Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,930,401 1,807,548

Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,935,119 $1,854,716

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Significant components of the income tax provision for the year ended December 31, 2011, 2010 and 2009are as follows:

2011 2010 2009

Current provision:Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,602,045 $ 8,478,494 $7,280,943State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,979,959 1,981,411 1,799,334

Deferred provision:Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (406,441) 514,132 (149,820)State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (46,450) 58,758 (17,122)

Total income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,129,113 $11,032,795 $8,913,335

The difference between income taxes at the U.S. federal statutory income tax rate of 35% and those reportedin the statements of income for the years ended December 31, 2010, 2009 and 2008 are as follows:

2011 2010 2009

Income taxes at U.S. Federal statutory rate . . . . . . . . . . . . . . . . . . . . . . $14,686,876 $10,419,727 $8,433,816State income tax, net of federal tax effect . . . . . . . . . . . . . . . . . . . 1,890,523 1,346,675 1,152,445Impact of tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (708,448) (590,928) (583,010)Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260,162 (142,679) (89,916)

$16,129,113 $11,032,795 $8,913,335

6. STOCK BASED COMPENSATION

Effective January 1, 2006, the Company adopted the provisions of FASB Codification topic, Compensation– Stock Compensation, which establishes accounting for stock-based awards exchanged for employee services.Accordingly, stock-based compensation cost is measured at the grant date based on the fair value of the award,and is recognized as an expense over the employee’s requisite service period. The Company recordedcompensation costs as the requisite service was rendered for the unvested portion of previously issued awardsthat remained outstanding at the initial date of adoption and any awards issued, modified, repurchased orcancelled after January 1, 2006.

The following table shows total stock-based compensation expense for the years ended December 31, 2011,2010 and 2009, included in the Statements of Income:

2011 2010 2009

Costs of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $348,274 $299,988 $299,988Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $579,950 $555,831 $619,992

Pre-tax stock-based compensation expense . . . . . . . . . . . . . . . . . $928,224 $855,819 919,980Less: income tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $362,007 $333,770 $358,792

Net stock-based compensation expense . . . . . . . . . . . . . . . . . . . . $566,217 $522,049 561,188

Basic and diluted per share impact . . . . . . . . . . . . . . . . . . . . . . . . $ 0.05 $ 0.05 $ 0.05

Cash flows resulting from excess tax benefits are required to be classified as a part of cash flows fromfinancing activities. Excess tax benefits are realized tax benefits from tax deductions for exercised options inexcess of the deferred tax asset attributable to stock compensation costs for such options. As a result, $0, $0 and$418,830 of excess tax benefits for the years ended December 31, 2011, 2010 and 2009, respectively, have beenclassified as a financing cash inflow. In addition to stock option exercises, the Company also pays dividends onrestricted stock which resulted in excess tax benefits of $42,266, $13,935 and $30,482 for the years endedDecember 31, 2011, 2010 and 2009, respectively, which are classified as cash flows from financing activities.

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2002 Stock Option Plan

Under the 2002 Stock Option Plan, the Company has authorized the issuance of equity-based awards for upto 865,333 shares of common stock to provide additional incentive to employees and officers. Pursuant to theplan, the Company can grant either incentive or non-qualified stock options. Options to purchase common stockunder the 2002 Stock Option Plan had been granted to Company employees with an exercise price equal to thefair market value of the underlying shares on the date of grant.

Stock options granted under the 2002 Stock Option Plan to executive officers of the Company becamevested as to all of the shares covered by such grant on the fifth anniversary of the grant date and expire on theseventh anniversary of the grant date. Stock options granted under the 2002 Stock Option Plan to employeesother than executive officers became vested as to 50% of the shares covered by the option grant on the thirdanniversary of the grant date and as to 100% of such shares on the fifth anniversary of the grant date. In addition,options became vested upon termination of employment resulting from death, disability or retirement. Suchoptions expired on the seventh anniversary of the grant date.

Under the methodology of the Codification, the fair value of the Company’s stock options was estimated atthe date of grant using the Black-Scholes option pricing model. The multiple option approach was used, withassumptions for expected option life of 5 years and 44% expected volatility for the market price of theCompany’s stock in 2002. An estimated dividend yield of 3% was used. The risk-free rate of return wasdetermined to be 2.79% in 2002. No options were granted in 2011, 2010 or 2009. There were no outstandingoptions as of December 31, 2011, December 31, 2010 or December 31, 2009. The 2002 Stock Option Planexpires on May 24, 2012.

A summary of stock option activity under the 2002 Stock Option Plan is as follows:

2011 2010 2009

SharesExercise

Price SharesExercise

Price SharesExercise

Price

Outstanding at beginning of year . . . . . . . . . . — $ — — $ — 82,608 $ 16.50Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — —Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — (79,006) 16.50Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — (3,602) 16.50

Outstanding at end of year . . . . . . . . . . . . . . . — $ — — $ — — $ —

Exercisable at end of year . . . . . . . . . . . . . . . — $ — — $ — — $ —

Shares available for future grants under theplan as end of year . . . . . . . . . . . . . . . . . . . 495,134 495,134 495,134

The aggregate intrinsic value (as measured by the difference between the exercise and strike price) ofoptions exercised during the years ended December 31, 2011, 2010 and 2009 was $0, $0 and $1,145,689,respectively.

As of December 31, 2011 and 2010, there was no unrecognized compensation cost related to non-vestedshare-based compensation arrangements granted under the 2002 Stock Option Plan.

2005 Restricted Stock Plan

On January 27, 2006, the Compensation Committee of the Board of Directors approved the grant of116,498 shares of restricted stock, effective January 30, 2006, to certain executive officers of the Company. Thegrant date fair value was $42.91 per share. The restricted stock vests in five equal annual installmentscommencing on the first anniversary of the date of grant.

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On May 17, 2006, the Compensation Committee of the Board of Directors approved the grant of17,810 shares of restricted stock, effective May 17, 2006, to the Chief Operating Officer of the Company. Thegrant date fair value was $42.11 per share. The restricted stock vested in five equal annual installmentscommencing January 30, 2007, and each January 30 thereafter.

On January 23, 2008, the Compensation Committee of the Board of Directors approved the grant of 16,471shares of restricted stock to the Company’s Vice President – Finance and Chief Financial Officer. The grant datefair value was $21.25 per share. The restricted stock was scheduled to vest in five equal annual installmentscommencing January 30, 2009, and each January 30 thereafter. On June 30, 2010, 9,883 shares of unvestedrestricted stock were forfeited, cancelled and returned to the authorized and unissued shares of the Company as aresult of the termination of employment of this individual on such date.

On April 18, 2011, the Compensation Committee of the Board of Directors approved the grant of a total of100,346 shares of restricted stock, effective April 18, 2011, to certain executive officers of the Company. Underthe terms of the restricted stock award agreements with the executive officers, the shares of restricted stock arescheduled to vest in five equal annual installments commencing on April 18, 2012 and each April 18 thereafter,assuming that the recipient of the award continues to serve as an executive officer of the Company on eachapplicable vesting date. Compensation expense for this grant will be recognized on a straight-line basis over fiveyears.

A summary of activity under the 2005 Restricted Stock Plan during the years ended December 31, 2011,2010 and 2009 is as follows:

Shares

Weigted-AverageGrant-DateFair Value

Nonvested stock outstanding at January 1, 2009 . . . . . . . . . . . . . . . . . . . . 76,086 $38.10Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,166 39.71Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —

Nonvested stock outstanding at December 31, 2009 . . . . . . . . . . . . . . . . . 52,920 $37.41

Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,166 39.71Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,883 21.25

Nonvested stock outstanding at December 31, 2010 . . . . . . . . . . . . . . . . . 19,871 $42.77

Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,346 60.79Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,871 42.77Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —

Nonvested stock outstanding at December 31, 2011 . . . . . . . . . . . . . . . . . 100,346 $60.79

As of December 31, 2011, there was $5,242,650 of total unrecognized compensation cost related tonon-vested share-based compensation arrangements granted under the 2005 Restricted Stock Plan. As ofDecember 31, 2011, this cost is expected to be recognized over a weighted-average period of 4.3 years.

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7. CONCENTRATION OF CREDIT RISK

Financial instruments, which potentially subject the Company to concentration of credit risk, consistprincipally of temporary cash investments and trade receivables. The Company places its temporary cashinvestments with credit-worthy, high-quality financial institutions.

The Company’s customer base is concentrated in the healthcare industry. Customers are located throughoutthe United States. The Company requires no collateral or other security to support customer accounts receivable.An allowance for doubtful accounts has been established for potential credit losses based on historical collectionexperience.

The Company maintains its cash and cash equivalents in bank deposit accounts, which, at times, may exceedfederally insured limits. The Company has not experienced any losses in such accounts and does not believe it isexposed to any significant credit risk on cash and cash equivalents.

8. FINANCING RECEIVABLES

The Company leases its information and patient care systems to certain healthcare providers under sales-type leases expiring in various years through 2017. These receivables typically have terms from two to fiveyears, bear interest at various rates, and are usually collateralized by a security interest in the underlying assets.Since the Company has a history of successfully collecting amounts due under the original payment terms ofthese extended payment arrangements without making any concessions to its customers, the Company satisfiesthe requirement for revenue recognition. The Company’s history with these types of extended payment termarrangements supports management’s assertion that revenues are fixed and determinable and probable ofcollection.

The components of these lease receivables were as follows on December 31:

2011 2010

Total minimum lease payments receivable . . . . . . . . . . . . . . . . . . . . . . . $ 8,254,652 $ 7,504,094Less allowance for losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (447,321) (233,396)Less unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (692,027) (796,610)

Lease receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,115,304 6,474,088Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,058,556) (2,041,811)

Amounts due after one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,056,748 $ 4,432,277

Future minimum lease payments to be received subsequent to December 31, 2011 are as follows:

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,701,6112013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,674,5252014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,112,5212015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 520,7562016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227,056Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,182

Total minimum lease payments to be received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,254,652Less unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (692,027)

Net leases receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,562,625

62

Credit Quality of Financing Receivables and Allowance for Credit Losses

The following table is a roll-forward of the allowance for financing credit losses for the years endedDecember 31, 2011 and 2010:

BeginingBalance Provision Charge-offs Recoveries

EndingBalance

December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $233,396 $ — $— $233,396December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . $233,396 $499,485 $(285,560) $— $447,321

The Company established an allowance for financing receivable credit losses during 2010 upon adoption ofASU 2010-20. This allowance is based on the historical level of customer defaults under such arrangements. TheCompany has been successful collecting its financing receivables and considers the credit quality of sucharrangements to be good, especially as the underlying assets act as collateral for the receivable.

The Company has also sold information and patient care systems to certain healthcare providers underextended payment terms. These receivables, included in current portion of financing receivables, typically haveterms from 3 to 12 months. Total amounts receivable under these arrangements at December 31, 2011 and 2010were $722,065 and $1,072,390, respectively.

9. BENEFIT PLANS

In January 1994, the Company adopted the Computer Programs & Systems, Inc. 401(k) Retirement Planthat covers all eligible employees of the Company who have completed one year of service. The plan allowseligible employees to contribute up to 60% of their pre-tax earnings up to the statutory limit prescribed by theInternal Revenue Service. The Company matches a discretionary amount determined by the Board of Directors.The Company contributed approximately $1,495,000, $1,256,000 and $1,222,000 to the plan for the years endedDecember 31, 2011, 2010 and 2009, respectively.

The Company provides certain health and medical benefits to eligible employees, their spouses anddependents pursuant to a benefit plan funded by the Company. Each participating employee contributes to theCompany’s costs associated with such benefit plan. The Company’s obligation to fund this benefit plan and payfor these benefits is limited through the Company’s purchase of an insurance policy from a third-party insurer.The amount established as a reserve is intended to recognize the Company’s estimated obligations with respect toits payment of claims and claims incurred but not yet reported under the benefit plan. Management believes thatthe recorded liability for medical self-insurance at December 31, 2011 and 2010 is adequate to cover the lossesand claims incurred, but these reserves are based on estimates and the amount ultimately paid may be more orless than such estimates.

10. OPERATING LEASES

The Company leased certain real property, most of which was owned by an entity that was partially ownedby an executive officer of the Company, during 2011, prior to the Company’s purchase of the property onDecember 13, 2011. The lease agreements had terms of ten years and were set to expire on or before December2015. These related party leases were cancelled in December 2011 in conjunction with the Company’s purchaseof these properties from the related party entity for $9.5 million. For the years ended December 31, 2011, 2010and 2009 total rent expense paid to the related party entity was approximately $1,901,810, $1,697,478 and$1,697,478, respectively. The Company also leased during 2011 office space in Mobile and Lanette, Alabama,and Monroe, Louisiana. These leases have terms expiring from 2012 through 2015, but do contain optionalextension terms.

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The future minimum lease payments payable under operating leases subsequent to December 31, 2011 areas follows:

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 517,9212013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 452,4012014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 452,4012015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176,871

$1,599,594

11. COMMITMENTS AND CONTINGENCIES

As of December 31, 2011, the Company is contingently liable as guarantor on a lease obligation betweenSolis Healthcare, LP (“Solis Healthcare”), as lessee, and Winthrop Resources Corporation (“Winthrop”), aslessor. Solis Healthcare purchased a software system from the Company and entered into a sale-leasebacktransaction with Winthrop in the first quarter of 2008. The Company provided this guarantee in order to facilitateSolis Healthcare in leasing the new system. The lease has an initial term of five years and continues fromyear-to-year thereafter until terminated. The Company is contingently liable as guarantor under the lease suchthat, if at any time prior to the termination of the lease, Solis Healthcare (i) enters into bankruptcy or (ii) defaultsfor more than 60 days in its payments or performance under the lease, the Company will be obligated to performunder the guaranty by making the required lease payments, including late fees and penalties. The guarantee runsfor the entire term of the lease; however, the maximum potential amount of future payments that the Companywould be required to make to Winthrop under the guaranty is $933,360, the balance of the lease payments as ofDecember 31, 2011, plus any fees and costs that Winthrop incurs in collecting amounts due under the lease(including attorney’s fees and costs). Due to the contingent nature of the guaranty, the maximum amount of theguaranty is not recorded on the balance sheet; however, when necessary, reserves are recorded to cover potentiallosses. A liability in the amount of $27,943, the amortized fair value of the guaranty, is recorded on the balancesheet as an other accrued liability at December 31, 2011. As of March 9, 2012, we were not aware of anyconditions that would effect the payment or performance risk of the lease obligation.

From time to time, the Company is involved in routine litigation that arises in the ordinary course ofbusiness. Management does not expect this to have a material adverse effect on the Company’s financialstatements.

12. COMPREHENSIVE INCOME

FASB Codification topic—Comprehensive Income, requires the disclosure of certain revenue, expenses,gains and losses that are excluded from net income in accordance with accounting principles generally acceptedin the United States of America. Total comprehensive income for the years ended December 31, 2011, 2010 and2009 is as follows:

Year ended December 31,

2011 2010 2009

Net income as reported . . . . . . . . . . . . . . . . . . . . . . . . . $25,833,390 $18,737,853 $15,183,283Other comprehensive income:

Unrealized gain(loss) on investments, net oftaxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (51,523) (41,200) 43,388

Total comprehensive income . . . . . . . . . . . . . . . . . . . . $25,781,867 $18,696,653 $15,226,671

64

13. FAIR VALUE

The Company adopted the provisions of FASB Codification topic, Fair Value Measurements andDisclosures, on January 1, 2008. These provisions establish a framework for measuring fair value and expandfinancial statement disclosures about fair value measurements. The provisions do not require any new fair valuemeasurements, but rather apply to all other accounting pronouncements that require or permit fair valuemeasurements. The provisions require that assets and liabilities carried at fair value be classified and disclosed inone of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

The fair values of the Company’s available-for-sale securities were based on matrix pricing for the periodsended December 31, 2011 and December 31, 2010, which basically treats all fixed income securities that deriveprice from yield and other market factors as Level 2. We generally apply fair value techniques on a non-recurringbasis associated with (1) valuing potential impairment loss related to financing receivables accounted forpursuant to Codification topic, Leases, and (2) valuing potential impairment loss related to long-lived assetsaccounted for pursuant to Codification topic, Property, Plant and Equipment, when events or circumstancesindicate as possible impairment.

The following table summarizes the carrying amounts and fair values of certain assets and liabilities atDecember 31, 2011 and December 31, 2010:

Fair Value at December 31, 2011 Using

CarryingAmount at12/31/2011

Quoted Prices inActive Markets for

Identical Assets(Level 1)

Significant OtherObservable Inputs

(Level 2)

SignificantUnobservable Inputs

(Level 3)

DescriptionAvailable-for-sale securities

Short-term investments (cash andaccrued income) . . . . . . . . . . . . . . $ 1,577,190 $ — $ 1,577,190 $ —

Mortgage backed securities . . . . . . . 102,832 — 102,832 —Obligations of U.S. Treasury, U.S.

government corporations andagencies . . . . . . . . . . . . . . . . . . . . 5,955,890 — 5,955,890 —

Corporate bonds . . . . . . . . . . . . . . . . 8,850,776 — 8,850,776 —

Total available-for-sale securites . . . . . . . $16,486,688 $ — $16,486,688 $ —

Fair Value at December 31, 2010 Using

CarryingAmount at12/31/2010

Quoted Prices inActive Markets for

Identical Assets(Level 1)

Significant OtherObservable Inputs

(Level 2)

SignificantUnobservable Inputs

(Level 3)

DescriptionAvailable-for-sale securities

Short-term investments (cash andaccrued income) . . . . . . . . . . . . . . $ 521,356 $ — $ 521,356 $ —

Mortgage backed securities . . . . . . . 121,571 — 121,571 —Obligations of U.S. Treasury, U.S.

government corporations andagencies . . . . . . . . . . . . . . . . . . . . 5,225,539 — 5,225,539 —

Corporate bonds . . . . . . . . . . . . . . . . 7,533,457 — 7,533,457 —

Total available-for-sale securites . . . . . . . $13,401,923 $ — $13,401,923 $ —

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14. SUBSEQUENT EVENTS

On January 23, 2012, the Company announced a dividend for the first quarter of 2012 in the amount of$0.46 per share. The dividend was paid on February 24, 2012 to stockholders of record as of the close of businesson February 9, 2012.

On January 23, 2012, the Board of Directors, upon the recommendation of the Compensation Committee,adopted a short-term incentive program for 2012 for certain executive officers of the Company (the “2012Incentive Program”). Under the 2012 Incentive Program, each executive officer of the Company, other thanexecutive officers earning any commission-based compensation, have a short-term incentive cash bonusopportunity based on achievements of a specified level of financial performance, specifically the Company’sEBITDA (as defined in the 2012 Incentive Program) in 2012 (“2012 EBITDA”) compared to the Company’sEBITDA in 2011 (“2011 EBITDA”).

Participants in the 2012 Incentive Program will receive 100% of their target award if the Company’s 2012EBITDA is 105% of 2011 EBITDA, 75% of the target award if the Company achieves a minimum, thresholdlevel of performance (2012 EBITDA reaching 95% of 2011 EBITDA), and a maximum of 150% of the targetaward for a maximum level of performance (2012 EBITDA equaling or exceeding 130% of 2011 EBITDA). Nopayments will be made for performance below the specified threshold amount. Payouts between the thresholdand maximum will be calculated by the Compensation Committee using the interpolation process described inthe 2012 Incentive Program. The Compensation Committee may make adjustments to the terms and conditionsof, and the criteria included in, awards under the 2012 Incentive Program in recognition of unusual ornonrecurring events affecting a participant or the Company, or the financial statements of the Company, or incertain other instances specified in the 2012 Incentive Program.

Awards earned under the 2012 Incentive Program will be paid solely in cash. In addition, awards pursuant tothe 2012 Incentive Program and subject to recovery or adjustments by the Company in certain circumstances inwhich the operating results on which payment was based are restated or otherwise adjusted or in the event that aparticipant’s conduct is not in good faith and materially disrupts, damages, impairs or interferes with the businessof the Company.

The foregoing description of the 2012 Incentive Program does not purport to be complete and is qualified inits entirety by reference to the 2012 Incentive Program, a copy of which is attached as Exhibit 10.1 to theForm 8-K filed by the Company with the Securities and Exchange Commission on January 27, 2012.

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15. QUARTERLY FINANCIAL STATEMENTS (UNAUDITED)

The following table presents a summary of our results of operations for our eight most recent quarters endedDecember 31, 2011. The information for each of these quarters is unaudited and has been prepared on a basisconsistent with the audited financial statements. This information includes all adjustments, consisting only ofnormal recurring adjustments, we consider necessary for fair presentation of this information when read inconjunction with the audited financial statements and related notes. Our operating results have varied on aquarterly basis and may fluctuate significantly in the future.

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

(In thousands except for share and per share data)

Year Ended December 31, 2011Sales revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,380 $ 48,839 $ 42,045 $ 42,212Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,136 24,157 19,477 18,642Operating income . . . . . . . . . . . . . . . . . . . . . . . . 8,491 11,518 9,638 10,527Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,373 7,916 5,989 6,555Net income per share . . . . . . . . . . . . . . . . . . . . . .

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.49 0.72 0.54 0.59Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.49 0.72 0.54 0.59

Weighted average shares outstanding . . . . . . . . .Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,962,874 11,044,474 11,063,220 11,063,220Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,962,874 11,044,474 11,063,220 11,063,220

Year Ended December 31, 2010 . . . . . . . . . . . . . . . . .Sales revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,541 $ 37,713 $ 40,913 $ 43,079Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,109 15,685 17,057 19,533Operating income . . . . . . . . . . . . . . . . . . . . . . . . 4,399 6,814 7,678 10,206Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,920 4,264 4,888 6,665Net income per share . . . . . . . . . . . . . . . . . . . . . .

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.27 0.39 0.45 0.61Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.27 0.39 0.45 0.61

Weighted average shares outstanding . . . . . . . . .Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,972,757 10,962,874 10,962,874 10,962,874Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,972,757 10,962,874 10,962,874 10,962,874

67

SCHEDULE IICOMPUTER PROGRAMS AND SYSTEMS, INC.VALUATION AND QUALIFYING ACCOUNTS

Description

Balance atbeginningof period

(1) Additionscharged to costand expenses

(2)Deductions

Balance at endof period

Allowance for doubtful accounts deducted fromaccounts receivable in the balance sheet . . . . . . . 2009 $628,000 $1,076,000 $945,000 $ 759,000

2010 $759,000 $ 849,000 $639,000 $ 969,0002011 $969,000 $ 937,000 $630,000 $1,276,000

(1) Adjustments to allowance for change in estimates.(2) Uncollectible accounts written off, net of recoveries.

Description

Balance atbeginningof period

(1) Additionscharged to costand expenses

(2)Deductions

Balance at endof period

Allowance for credit losses deducted fromfinancing receivables in the balance sheet . . . . . . 2009 $ — $ — $ — $ —

2010 $ — $233,396 $ — $233,3962011 $233,396 $499,485 $285,560 $447,321

(1) Adjustments to allowance for change in estimates.(2) Uncollectible accounts written off, net of recoveries.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that theinformation required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms, and that such information is accumulated and communicated toour management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allowtimely decisions regarding required disclosure. Because of the inherent limitations to the effectiveness of anysystem of disclosure controls and procedures, no evaluation of disclosure controls and procedures can provideabsolute assurance that all control issues and instances of fraud, if any, with a company have been prevented ordetected on a timely basis. Even disclosure controls and procedures determined to be effective can only providereasonable assurance that their objectives are achieved.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision andwith the participation of our management, including our Chief Executive Officer and Chief Financial Officer, ofthe effectiveness of the design and operation of our disclosure controls and procedures (as defined in ExchangeAct Rule 13a-15(e)) pursuant to Rule 13a-15 of the Exchange Act. Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effectiveat the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in ExchangeAct Rule 13a-15(f)) during the quarter ended December 31, 2011 that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financial reporting.

68

Management’s Annual Report on Internal Control Over Financial Reporting

This report is included in Item 8 on page 46 and is incorporated herein by reference.

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

This report is included in Item 8 on page 48 and is incorporated herein by reference.

ITEM 9B. OTHER INFORMATION.

None.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

We have adopted a Code of Business Conduct and Ethics applicable to all of our directors, officers(including our Chief Executive Officer and senior financial officers) and employees. We have also adopted aseparate code of ethics with additional guidelines and responsibilities applicable to our Chief Executive Officerand senior financial officers, known as the Code of Ethics for CEO and Senior Financial Officers. Copies of theCode of Business Conduct and Ethics and the Code of Ethics for CEO and Senior Financial Officers are availableon CPSI’s website at www.cpsinet.com in the “Investors” section under “Governance.”

Other information required by this Item regarding executive officers is included in Part I of this Form 10-Kunder the caption “Executive Officers” in accordance with Instruction 3 of the Instructions to Paragraph (b) ofItem 401 of Regulation S-K.

Other information required by this Item is incorporated by reference pursuant to General Instruction G(3) ofForm 10-K from CPSI’s definitive Proxy Statement for the 2012 Annual Meeting of Stockholders to be filed withthe Securities and Exchange Commission pursuant to Regulation 14A.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference pursuant to General Instruction G(3) ofForm 10-K from CPSI’s definitive Proxy Statement for the 2012 Annual Meeting of Stockholders to be filed withthe Securities and Exchange Commission pursuant to Regulation 14A.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND RELATED STOCKHOLDER MATTERS

The information required by this Item is incorporated by reference pursuant to General Instruction G(3) ofForm 10-K from CPSI’s definitive Proxy Statement for the 2012 Annual Meeting of Stockholders to be filed withthe Securities and Exchange Commission pursuant to Regulation 14A.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORINDEPENDENCE

The information required by this Item is incorporated by reference pursuant to General Instruction G(3) ofForm 10-K from CPSI’s definitive Proxy Statement for the 2012 Annual Meeting of Stockholders to be filed withthe Securities and Exchange Commission pursuant to Regulation 14A.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item is incorporated by reference pursuant to General Instruction G(3) ofForm 10-K from CPSI’s definitive Proxy Statement for the 2012 Annual Meeting of Stockholders to be filed withthe Securities and Exchange Commission pursuant to Regulation 14A.

70

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) and (2) and (c) - Financial Statements and Financial Statement Schedules.

Financial Statements: The Financial Statements and related Financial Statements Schedule of CPSIare included herein in Part II, Item 8.

(a)(3) and (b) – Exhibits.

The exhibits listed on the Exhibit Index at page 73 of this Form 10-K are filed herewith or areincorporated herein by reference.

71

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registranthas duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this the12th day of March, 2012.

COMPUTER PROGRAMS AND SYSTEMS, INC.

By: /s/ J. Boyd Douglas

J. Boyd DouglasPresident and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Name Title Date

/s/ David A. Dye

David A. Dye

Chairman of the Board and Director,Chief Financial Officer(principal financial officer)

March 12, 2012

/s/ J. Boyd Douglas

J. Boyd Douglas

President, Chief Executive Officer andDirector (principal executive officer)

March 12, 2012

/s/ James B. Britain

James B. Britain

Vice President – Finance and Controller(principal accounting officer)

March 12, 2012

/s/ Ernest F. Ladd, III

Ernest F. Ladd, III

Director March 12, 2012

/s/ W. Austin Mulherin, III

W. Austin Mulherin, III

Director March 12, 2012

/s/ William R. Seifert, II

William R. Seifert, II

Director March 12, 2012

/s/ John C. Johnson

John C. Johnson

Director March 12, 2012

/s/ Charles P. Huffman

Charles P. Huffman

Director March 12, 2012

72

Exhibit Index

ExhibitNumber Description

3.1 Certificate of Incorporation (filed as Exhibit 3.4 to CPSI’s Registration Statement on Form S-1(Registration No. 333-84726) and incorporated herein by reference)

3.2 Bylaws (filed as Exhibit 3.6 to CPSI’s Registration Statement on Form S-1 (Registration No. 333-84726) and Incorporated herein by reference)

10.1* 2002 Stock Option Plan (filed as Exhibit 10.3 to CPSI’s Registration Statement on Form S-1(Registration No. 333-84726) and incorporated herein by reference)

10.2* First Amendment to 2002 Stock Option Plan (filed as Exhibit 10.2 to CPSI’s Current Report on Form8-K Dated May 12, 2005, and incorporated herein by reference)

10.3* Second Amendment to 2002 Stock Option Plan

10.4* Form of Non-Qualified Stock Option Agreement for executive officers (filed as Exhibit 10.4 toCPSI’s Registration Statement on Form S-1 (Registration No. 333-84726) and incorporated herein byreference)

10.5* Amendment and Restatement of 2005 Restricted Stock Plan (filed as Exhibit 10.6 to CPSI’s AnnualReport on Form 10-K for the period ended December 31, 2005 and incorporated herein by reference)

10.6* Form of Restricted Stock Award Agreement under the 2005 Restricted Stock Plan (filed asExhibit 10.1 to CPSI’s Current Report on Form 8-K dated January 30, 2006, and incorporated hereinby reference)

10.7 Form of Indemnity Agreement entered into by CPSI and each of its non-employee directors (filed asExhibit 10.1 to CPSI’s Quarterly Report on Form 10-Q for the period ended September 30, 2002 andincorporated herein by reference)

10.8 Real Property Lease, dated April 1, 2022, between CPSI and C.P. Investments, Inc. (filed asExhibit 10.1 to CPSI’s Registration Statement on Form S-1 (Registration No. 338-84726) andincorporated herein by reference)

10.9 Real Property Lease dated April 1, 2002, between CPSI and DJK, LLC (filed as Exhibit 10.2 toCPSI’s Registration Statement on Form S-1 (Registration No. 333-84726) and incorporated herein byreference) (This lease was assumed by C. P. Investments, Inc. in 2005)

10.10 Real Property Lease, dated October 1, 2002, between CPSI and C.P. Investments, Inc. (filed asExhibit 10.10 to CPSI’s Annual Report on Form 10-K for the period ended December 31, 2002 andincorporated herein by reference)

10.11 Real Property Lease, dated November 1, 2002, between CPSI and C.P. Investments, Inc. (filed asExhibit 10.11 to CPSI’s Annual Report on Form 10-K for the period ended December 31, 2002 andincorporated herein by reference)

10.12 Real Property Lease, dated June 16, 2002, between CPSI and C.P. Investments, Inc. (filed asExhibit 10.12 to CPSI’s Annual Report on Form 10-K for the period ended December 31, 2003 andincorporated herein by reference)

10.13 Real Property Lease, dated March 15, 2005, between CPSI and C.P. Investments, Inc. (filed asExhibit 10.12 to CPSI’s Annual Report on Form 10-K for the period ended December 31, 2005 andincorporated herein by reference)

10.14 Real Property Lease, dated November 15, 2005, between CPSI and C.P. Investments, Inc. (filed asExhibit 10.13 to CPSI’s Annual Report on Form 10-K for the period ended December 31, 2005 andincorporated herein by reference)

73

ExhibitNumber Description

10.15 Real Property Lease, dated December 15, 2005, between CPSI and C.P. Investments, Inc. (filed asExhibit 10.14 to CPSI’s Annual Report on Form 10-K for the period ended December 31, 2005 andincorporated herein by reference)

10.16 Real Property Lease Agreement, dated September 14, 2009 between CPSI and 3725 AirportBoulevard, LP (filed As Exhibit 10.1 to CPSI’s Quarterly Report on Form 10-Q for the period endedSeptember 30, 2009 and Incorporated herein by reference)

10.17 First Amendment to Real Property Lease Agreement, dated October 9, 2009, between CPSI and 3725Airport Boulevard, LP (filed as Exhibit 10.2 to CPSI’s Quarterly Report on Form 10-Q for the periodended September 30, 2009 and incorporated herein by reference)

10.18* 2011 Executive Officer Incentive Program (filed as Exhibit 10.1 to CPSI’s Current Report onForm 8-K dated April 18, 2011 and incorporated herein by reference)

10.19* 2012 Executive Officer Incentive Program (filed as Exhibit 10.1 to CPSI’s Current Report onForm 8-K dated January 23, 2012 and incorporated herein by reference)

10.20 Real Estate Sales Agreement, dated November 14, 2011, between C.P. Investments, Inc. and CPSI(filed as Exhibit 10.1 to CPSI’s Current Report on Form 8-K dated November 14, 2011 andincorporated herein by reference)

10.21* Commission Program for Victor S. Schneider

10.22* Commission Program for Troy D. Rosser

23.1 Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm

31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101 Interactive Data Files for CPSI’s Form 10-K for the period ended December 31, 2011

* Compensation plan or arrangement

74

Exhibit 10.21

COMMISSION PROGRAM – SCOTT SCHNEIDER(effective January 1, 2011)

Position Title: Senior Vice President-Corporate and Business DevelopmentDescription: Responsible for revenue generation efforts, executive customer relations, strategic growth

initiatives and positioning, and market execution.

1. Commission Structure:

A. Sales of Software and Hardware:

With respect to each contract for the sale of a software license and/or hardware to a new or existingcustomer of CPSI (whether pursuant to a standard sales contract or a SaaS contract), the commissionrate shall be 0.5% of CPSI’s gross profit or anticipated gross profit, as the case may be, from such sale,calculated as of the date of completion of installation. Commissions are earned at the time ofcompletion of installation of the applicable software/hardware. The timing of payment of earnedcommissions shall be in accordance with Section 2 below.

B. Business Management Services:

With respect to each contract entered into for the provision of business management services, thecommission rate shall be 1.0% of CPSI’s revenues from such contract during the first two (2) yearsfollowing execution of the contract. Commissions are earned at the time that the Company recognizesrevenue from such contract under GAAP. The timing of payment of earned commissions shall be inaccordance with Section 2 below.

2. Timing of Commission Payments:

A. General: Subject to Section 2.B. through Section 2.D. below, commissions earned pursuant to Section 1above will be paid to the employee on a monthly basis.

B. Payment Default By Customer: In the event that a customer defaults on payment for software licenses,hardware or business management services, all commissions previously paid to the employee on thedefaulted customer account shall be deducted from the employee’s future commission payments. In theevent that partial payment due from a customer is received, the amount of prior commissions to bededucted from future commissions will be pro-rata based on the amount of the payment received. Forexample, if a customer pays only 60% of an invoice, then the employee will retain 60% of thecommissions received, with the remaining 40% to be withheld from future commission payments.

C. Post-Employment Commission Payments: Except as noted in Section 2.D., below, commissions willnot be paid to, or on behalf of, any individual who is no longer an employee of CPSI, regardless of thereason for the employee’s termination of employment (i.e., whether voluntary, involuntary orotherwise).

D. Death: In the event of the death of the employee while employed in good standing with CPSI, thefollowing commissions will be paid to the employee’s estate/beneficiary(ies) as listed in theemployee’s last will and testament (or if no such will, to the employee’s spouse, if any; if not, to theemployee’s estate) at the same time that such payments would have been paid to the employee if theemployee had not died:

(i) Commissions from the installation of software licenses and hardware at new customers during the90-day period following the employee’s death (to the extent that a contract for such installationwas executed prior to the employee’s death);

(ii) Commissions from the installation of software licenses and hardware at existing customers duringthe 90-day period following the employee’s death; and

(iii) Commissions from the provision of business management services during the 90-day periodfollowing the employee’s death (to the extent that CPSI has recognized revenue under GAAPfrom the provision of such services within such 90-day period).

3. Exemption From Section 409A:

This Commission Program is intended to be exempt from Section 409A of the Internal Revenue Code of1986, as amended.

4. Modification/Termination:

This Commission Program shall remain in full force and effect unless and until modified or terminated byCPSI in its sole discretion.

2

Exhibit 10.22

COMMISSION PROGRAM – TROY ROSSER(effective January 1, 2011)

Position Title: Senior Vice President – SalesDescription: Responsible for overseeing all sales and marketing efforts nationwide.

1. Commission Structure:

A. Sales of Software and Hardware – New Customers:1

With respect to each contract for the sale of a software license and/or hardware to a new customer ofCPSI (whether pursuant to a standard sales contract or a SaaS contract), the commission rate shall be1.0% of CPSI’s gross profit or anticipated gross profit, as the case may be, from such sale, calculatedas of the date of completion of installation. In the event that CPSI’s gross profit from sales of softwarelicenses and hardware to new customers exceeds $14,000,000 in a calendar year, the commission ratewill increase to 1.5% of the gross profit from sales exceeding $14,000,000 in such year. Commissionsare earned at the time of completion of installation of the applicable software/hardware. The timing ofpayment of earned commissions shall be in accordance with Section 2 below.

B. Sales of Software and Hardware – Existing Customers:

With respect to each contract for the sale of a software license and/or hardware to an existing customerof CPSI (whether pursuant to a standard sales contract or a SaaS contract), the commission rate shall be0.5% of CPSI’s gross profit or anticipated gross profit, as the case may be, from such sale, calculatedas of the date of completion of installation. Commissions are earned at the time of completion ofinstallation of the applicable software/hardware. The timing of payment of earned commissions shallbe in accordance with Section 2 below.

C. Business Management Services:

With respect to each contract entered into for the provision of business management services, thecommission rate shall be 1.0% of CPSI’s revenues from such contract during the first two (2) yearsfollowing execution of the contract. Commissions are earned at the time that the Company recognizesrevenue from such contract under GAAP. The timing of payment of earned commissions shall be inaccordance with Section 2 below.

2. Timing of Commission Payments:

A. General: Subject to Section 2.B. through Section 2.D. below, commissions earned pursuant to Section 1above will be paid to the employee on a monthly basis.

B. Payment Default By Customer: In the event that a customer defaults on payment for software licenses,hardware or business management services, all commissions previously paid to the employee on thedefaulted customer account shall be deducted from the employee’s future commission payments. In theevent that partial payment due from a customer is received, the amount of prior commissions to bededucted from future commissions will be pro-rata based on the amount of the payment received. Forexample, if a customer pays only 60% of an invoice, then the employee will retain 60% of thecommissions received, with the remaining 40% to be withheld from future commission payments.

1 For purposes of this Commission Program, a customer is considered a “new customer” of CPSI for a period ofone year from the date that the first software module is installed by CPSI with such customer.

C. Post-Employment Commission Payments: Except as noted in Section 2.D., below, commissions willnot be paid to, or on behalf of, any individual who is no longer an employee of CPSI, regardless of thereason for the employee’s termination of employment (i.e., whether voluntary, involuntary orotherwise).

D. Death: In the event of the death of the employee while employed in good standing with CPSI, thefollowing commissions will be paid to the employee’s estate/beneficiary(ies) as listed in theemployee’s last will and testament (or if no such will, to the employee’s spouse, if any; if not, to theemployee’s estate) at the same time that such payments would have been paid to the employee if theemployee had not died:

(i) Commissions from the installation of software licenses and hardware at new customers during the90-day period following the employee’s death (to the extent that a contract for such installationwas executed prior to the employee’s death);

(ii) Commissions from the installation of software licenses and hardware at existing customers duringthe 90-day period following the employee’s death; and

(iii) Commissions from the provision of business management services during the 90-day periodfollowing the employee’s death (to the extent that CPSI has recognized revenue under GAAPfrom the provision of such services within such 90-day period).

3. Exemption From Section 409A:

This Commission Program is intended to be exempt from Section 409A of the Internal Revenue Code of1986, as amended.

4. Modification/Termination:

This Commission Program shall remain in full force and effect unless and until modified or terminated byCPSI in its sole discretion.

2

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our reports dated March 12, 2012, with respect to the financial statements, schedule and internalcontrol over financial reporting included in the Annual Report of Computer Programs and Systems, Inc. on Form10-K for the year ended December 31, 2011. We hereby consent to the incorporation by reference of said reportsin the Registration Statements of Computer Programs and Systems, Inc. on Forms S-8 (File No. 333-97431,effective July 31, 2002 and File No. 333-131165, effective January 20, 2006).

/s/ GRANT THORNTON LLPAtlanta, GeorgiaMarch 12, 2012

Exhibit 31.1

CERTIFICATION

I, J. Boyd Douglas, certify that:

1. I have reviewed this annual report on Form 10-K of Computer Programs and Systems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to statea material fact necessary to make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report,fairly present in all material respects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controlover financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant andhave:

(a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures tobe designed under our supervision, to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others within those entities, particularlyduring the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financialreporting to be designed under our supervision, to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in thisreport our conclusions about the effectiveness of the disclosure controls and procedures, as of the endof the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting thatoccurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in thecase of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation ofinternal control over financial reporting, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control overfinancial reporting which are reasonably likely to adversely affect the registrant’s ability to record,process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal control over financial reporting.

Date: March 12, 2012 /s/ J. Boyd Douglas

J. Boyd DouglasPresident and Chief Executive Officer

Exhibit 31.2

CERTIFICATION

I, David A. Dye, certify that:

1. I have reviewed this annual report on Form 10-K of Computer Programs and Systems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to statea material fact necessary to make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report,fairly present in all material respects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controlover financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant andhave:

(a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures tobe designed under our supervision, to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others within those entities, particularlyduring the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financialreporting to be designed under our supervision, to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in thisreport our conclusions about the effectiveness of the disclosure controls and procedures, as of the endof the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting thatoccurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in thecase of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation ofinternal control over financial reporting, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control overfinancial reporting which are reasonably likely to adversely affect the registrant’s ability to record,process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal control over financial reporting.

Date: March 12, 2012 /s/ David A. Dye

David A. DyeChief Financial Officer

Exhibit 32.1

Certifications of Chief Executive Officerand Chief Financial Officer

Pursuant to18 U.S.C. Section 1350,As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of Computer Programs and Systems, Inc. (the “Company”) on Form10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission on the datehereof (the “Report”), J. Boyd Douglas, President and Chief Executive Officer of the Company, and David A.Dye, Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities ExchangeAct of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial conditionand results of operations of the Company.

Dated: March 12, 2012

/s/ J. Boyd Douglas

J. Boyd DouglasPresident and Chief Executive Officer

/s/ David A. Dye

David A. DyeChief Financial Officer